Many of you might know that Foreign Institutional Investors (FIIs) primarily drive the Indian equity markets. This is true particularly when retail participation is very low. While domestic Individual investors dumped stocks on every rise and mutual funds remained net sellers too; FIIs continued to be bullish on India. In the year 2013, FIIs have pumped in about USD 20 billion (Rs 1.13 lakh crore) in Indian equities.

Trends in FII investment...

Data for the month of December is only till 27th of the month
(Source: ACE MF, PersonalFN Research)

Although capital Flows of FIIs into equities remained robust for almost 9 months of the year, those into debt were quite volatile. FIIs remained net sellers of Indian debt for about 6 months of the year while they offloaded more equities than they bought in 3 consecutive months starting from June.

During this period, Indian rupee depreciated sharply by about 20%. Widening Current Account Deficit (CAD) and speculation about the Federal Reserve (Fed) reducing the pace of bond buying programme, triggered selloffs in equities. To curb heavy outflows of dollars and lessen the demand for the greenback; RBI sucked out excess liquidity in the system. RBI believed that excess liquidity was causing currency speculation. It had affected short term as well as long term interest rates. As the government loosened it purse to fund populous schemes and allow subsidies; problem of fiscal deficit mounted. At present, the government has already exhausted 84% of its full year fiscal deficit target with another 3 months left for the closure of the current fiscal.

Factors that may affect FII investments in 2014...
Pace of rollback of monetary stimulus in the U.S. would significantly affect the investments of FIIs in emerging markets. As decided by the central bank of the U.S., the quantum of stimulus would be USD 75billion rather than USD 85 billion from January 2014. Treasury yields in the U.S. have been constantly rising. If Fed continues to taper at regular intervals; FII flows to India might less intense. Moreover, tapering of stimulus in the U.S. may put downward pressure on rupee. Falling rupee would be a negative for Indian capital markets. However, it shouldn't be ignored that despite domestic markets in Indian being surrounded by the negative news besides a few exceptions, FIIs have preferred Indian equities in the Brazil-Russia-India-China (BRIC) pack. This might suggests that, by and large FIIs expect Indian markets to bottom out in the forcible future. On the other hand retail inflation, RBI monetary policy and fiscal deficit would decide whether FIIs come back to Indian debt. If inflation is contained and RBI adopts a pro-growth stance; then both, equity and debt markets may react positively. Outcome of upcoming Lok Sabha Elections would also affect the market sentiment.

PersonalFN is of the view that, although, FIIs dominate the movement of Indian markets, that is mainly due to the huge amount they invest in or withdraw from India. Like all other investors, FIIs too are there to generate profits on their investments; but there is a point of distinction. They might try to assess risk-reward potential of various countries along with comparison among one another based on taxation, economic outlook and compliance requirements among other factors. PersonalFN believes rather than following FII trends for taking directional cue; you would be better off following their personalised asset allocation which aims at helping you achieve your long term goals.

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