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Negative November: First time after liberalisation, outflows exceeded inflows

Kishori Gopalkrishnan in Bombay

The Southeast Asian currency crisis has taken yet another heavy toll on the Indian economy. For the first time since 1992 when overseas institutions were allowed to invest in India, investments by foreign institutional investors turned negative in November.

Data released by the Securities and Exchange Board of India revealed that FII outflows amounted to Rs 5.5 billion ($ 148.7 million) in November. Gross sales by FIIs amounted to Rs 16.5 billion while total purchases came up only to Rs 11 billion. The data further stated that net outflows from equity investments amounted to Rs 4.1 billion ($ 111.3 million), and Rs 1.4 billion ($ 37.4 million) from debt investments.

In fact, net outflows in the first fortnight of November alone stood at $ 58.4 million. The cumulative FII investments for the year came down by $ 50 million in 10 days flat to touch $ 9.05 billion from $ 9.10 billion at the beginning of the month.

Gross purchases in the first 14 days of November stood at Rs 5.35 billion while sales touched Rs 7.47 billion, resulting in net outflow of Rs 2.12 billion.

This is in sharp contrast to October 1997 when FIIs made gross purchases of Rs 19.93 billion against gross sales of Rs 10.09 billion, leaving a positive net investment of Rs 9.84 billion ($ 272 million).

The cumulative net investment by FIIs in Indian stock markets at the end of November 1997 stood at $ 9.13 billion, down from $ 9.28 billion at the end of October 1997.

With the rupee on a roller-coaster ride and depreciating to below the Rs 39-level in the space of a fortnight, it was expected that overseas investors would press sales because of the loss of value of their holdings on account of a depreciated rupee.

The first bout of FII selling came in as the Hong Kong stock indices dove. Many overseas investors became jittery and began panic-selling thinking that Indian stock markets too would follow the other emerging markets in South-East Asia.

In the words of many FIIs, "India stood like a pillar of strength in Asia," they added that the funds had to sell off much of their holdings in view of the year-end redemptions in December.

Even as the stockmarkets were losing ground consistently during the period, FIIs apprehending that a depreciated rupee could erode much of the valuation of their present holdings, decided to turn into heavy sellers.

Senior FII officials however, downplayed the negative inflows. "This happens all the time in emerging market countries. In fact, India was lucky not to have any negative inflows since 1993... it was actually an aberration.''

While gross FII purchases of equity during the month amounted to Rs 10.9 billion, gross sales stood at Rs 15.1 billion. Gross FII purchases of debt in November amounted to Rs 50 million while gross sales stood at Rs 1.4 billion, said the SEBI release.

Against net FII investment outflows in November, there was a net inflow of Rs 9.8 billion ($ 272 million) in October. Net inflow on the equity account in October was Rs 6.3 billion ($ 174.9 million) while net inflow on the debt account was Rs 3.5 billion ($ 97 million). Cumulative net FII investment in India fell to $ 9.13 billion in November from $ 9.28 billion in October.

Historically, November has witnessed a dip in investments but net inflows for the month have always been positive. But current trends point to a negative net inflow a net outflow, for the first time in recent years. As the year draws to a close, FIIs who follow the calendar year turn net sellers to meet redemption pressures and to an extent, in anticipation of the holiday season in December when no FII would invest money in an emerging market.

Considering the uncertainty in the currency markets, that inflows are negative is not surprising, investment bankers feel. Also, the $ 58-million outflow is not substantial and is a "mere blip'' as compared to the outflows witnessed in other Asian markets, they added.

Says Alok Bajpai of BZW, "Although in absolute terms $ 58 million is an outflow, in relative terms the number is very small, especially compared with other Asian economies.'' Considering that Indian markets were a relative oasis compared to other stormy Asian markets, several analysts have been predicting that India would attract higher allocations next year compared to its neighbours.

"The small outflows already are a pointer to the fact that allocations for Indian markets would be higher next year,'' says another leading investment banker. Due to massive redemptions, especially in the wake of the crisis in the global markets, foreign fund managers have been forced to liquidate their holdings in emerging markets.

"The biggest challenge for the Reserve Bank of India governor is how he manoeuvres India through the current regional turmoil,'' Aashish Pitale, an analyst at ICICI Securities and Finance Co, says in a research paper.

The Indonesian rupaiah and the Thai baht fell more than 35 per cent against the dollar in the first 10 months of 1997, the Malaysian and Philippine units sank over 25 per cent, and those of South Korea, Taiwan and Singapore were all close to 10 per cent weaker.

"The substantial devaluations of a number of ASEAN countries are of great significance to exporting countries in the region,'' says Mark White, chief executive of the Hong Kong- based Jardine Fleming Investment Management Ltd.

Indian exporters will undoubtedly be hit by the exchange rate factor. With inflows likely to slow and FIIs wary, Indian firms are likely to switch from external commercial borrowings to domestic borrowings in order to avoid currency risks and lock into falling local interest rates.

FII investments account for around $ 9 billion of India's currency reserves, which today stands at over $ 28 billion. Forecasts of foreign capital inflows for 1997-98 (April-March) range between $ 9 billion and $ 12 billion, but these were given before funds began chopping exposure to emerging markets.

The scene has vastly shifted from October, when net FII investments crossed $ 190.5 billion. While cumulative foreign portfolio investments since 1993 stood at $ 9.12 billion up to October 22, gross purchases were Rs 11.55 billion during the period October 1 to 22, and sales totalled Rs 4.66 billion, leaving a net investment of Rs 6.89 billion.