News: India witnesses over $1.2 b foreign funds outflow

(BL 31/05/2006) Mumbai - India and Korea bore the major brunt of the recent sell-off by foreign funds in emerging markets. It is estimated that foreign funds pulled out about $5 billion last week from emerging markets with India alone witnessing an outflow of over $1.2 billion.

According to data filed with the Securities and Exchange Board of India, the total sell-off by foreign funds in the last eight trading sessions accounted for $2.5 billion (Rs 11,131 crore).

The pull out from Korea was higher during last week at $1.549 billion, according to the Emerging Portfolio Fund Research, which tracks foreign fund flows into emerging markets.

The other major markets that have witnessed sell-off include Taiwan ($1.185 billion), followed by Thailand ($555 million).

"India has been receiving out of proportion inflows by foreign funds," said Chetan Ahya, Executive Director, JM Morgan Stanley, a leading investment bank. According to him, Indian equity markets were receiving about 20-25 per cent share of overseas funds dedicated to emerging markets.

With foreign funds turning net sellers after the rise in the US interest rates, it was only natural that the sell-off is on a larger scale in India, Ahya said.

However, according to analysts, the sell-off by foreign funds may have stopped for the moment. "Any major impact on the stock prices will have a drastic impact on the existing holdings by foreign funds," said a research analyst in a local broking firm. "Long-term players will stay invested, while short-term participants like hedge funds move out in search of better returns," he said.

At present, foreign funds hold over $43 billion worth stocks in India (after the recent trimming in holdings) and fall in prices would mean that the value of their holdings come down. The benchmark BSE-30 Sensex has shed 1884.48 points or about 15 per cent from the peak of 12,671.11 points on May 11.

"There are always some new funds waiting to enter once the stock prices fall to a certain level. It is wrong to categorise FIIs as just one segment," said Rajan Krishnan, Business Head (Asset Management), Principal PNB Asset Management Company.

Two years ago there were 552 registered FIIs in the country. Today, the figure has risen to 916, according to SEBI.