Flight of FII money to continue, say experts

Equity bechmarks closed at near 5-month lows on Friday, falling for the third successive day, on concerns that uncontrolled inflation may hurt economic growth and corporate earnings earlier than feared, and accelerate the pace of foreign fund outflows.

The second-line shares bore the brunt of the selling pressure as the 50-share Nifty index breached a key psychological level of 5500 intra-day. The BSE Sensex hit a low of 18235.45, before partially recouping losses to close at 18395.97, down 288.46 points or 1.5% over the previous close. The Nifty closed at 5512.15, down 91 points or 1.6%.
The decline in the BSE Mid and Small cap indices was sharper:2.7% and 3.6% respectively. Market participants attribute the continuing slide mainly to selling by foreign portfolio investors, who are now eyeing other more attractively valued markets. This month alone, foreign fund houses have net sold around Rs 7300 crore worth of Indian shares. Domestic institutions, including mutual funds and insurers have bought over Rs 4000 crore worth of shares during this period. But brokers warn there is not enough domestic liquidity going around to absorb foreign outflows, should they intensify. "We are generally seeing people becoming less enthusiastic about emerging markets with concerns over inflation forcing central bank to slowdown growth," Adrian Mowat, chief Asian and EM equity strategist, JP Morgan, told CNBC TV 18. "With that type of background there is no urgency for people to buy market which makes them quite vulnerable to any negative news so I think this weakness is going to last for a while in emerging markets
up until investors become confident, they understand what the policymakers are going to be doing," he said. Earlier this week, the Reserve Bank of India raised key rates by 25 basis points to check inflation, and market watchers expect more such rate hikes in the next few months even as the factors behind the unprecedented price rise are beyond the central bank's control. Indian shares are trading at roughly 18-19 times their expected earnings for the current financial year; significantly higher than most other emerging markets. "When our markets have been under performing the international markets, especially the developed markets, clearly there is much more money to go out. So we are in for this sort of a bearish move at least for while longer," said Ambareesh Baliga of Karvy Stock Broking. Last year, foreign funds had net
invested over $29 billion in Indian equities. With higher costs threatening to eat into corporate profit margins, the average earnings growth rate may
not be attractive enough for India to sustain such a high valuation premium over its peers, brokers say. "I think the things that have been bothering the market have not really changed which is inflation and high interest rates. I think that is what continues to plague the market," said Rajeev Anand, CEO & MD, Axis AMC. Bank shares, which were hammered on the day of the credit policy Tuesday, fared better than most other sectors, following strong quarterly numbers from Bank of Baroda, Indian Overseas Bank, UCO Bank, Oriental Bank of Commerce, Karur Vysya Bank and Allahabad Bank. Among non-banks, Titan Industries, Sun TV and Oberoi Realty reported strong third quarter numbers, while  profit numbers of Siemens and Bharat Electronics disappointed. The BSE Bankex fell 1.1%. But sellers continued to target other interest rate sensitive sectors like auto and realty, which were among the worst performers of the day. The BSE Realty index fell around 5%, and the BSE Auto index, around 4%.