India was the most expensive among emerging markets

Sandeep Singal, Co-head, Institutional Equities at Emkay Global Financial Services, talks about what impacts FII investments and its importance for the Indian market.

FIIs have become net sellers in the Indian equity market from April. What factors are affecting this investment decision?

The rally in the market from January till March was a rally of hope before the union budget. Markets were oversold but were expecting the finance minister to bring a few sweeping changes. However, the budget did not bring the excitement that was expected. On the contrary, provisions of GAAR (General Antiavoidance Rules) affected sentiments. The rupee continued to depreciate against the dollar. There was a clear inaction on the part of government on the policy front. India was the most expensive among emerging markets. All these affected investment decisions.

How dependant is the Indian equity market on FII investment and is this an impediment for market growth?

Foreign investor fund flows are very important for Indian markets to grow, particularly when there is no growth or hardly any growth in the equity assets under management of the mutual fund industry and premium collection is not growing in the insurance sector for a sustained period of time.

What will bring foreign institutional investors back?

On the earnings front, we saw rural income taking a hit, visible in tractor sales volume. Also, discretionary demand was hit, evident from volume numbers of decorative paints, four-wheelers and consumer durables. Higher NPAs and provisioning made banking results unexciting and in the absence of investments, order flow for the capital goods industry slowed. On the policy front, the government could not take a decision on increasing FDI in insurance, allowing FDI in multi-band retail, opening up the airlines sector, DTC and GST. There remained an environment of policy paralysis and corruption issues kept cropping up. Investors need to see a reversal on both fronts to come back to invest in India.

How much does the movement of the rupee impact the FIIs buying decision?

Rupee movement is a major consideration. In fact, year-todate, the index return is about 7% in dollar terms as compared with 14% in rupee terms. It is similar for other Asian or emerging markets. Also, when an investor loses money only because of currency, it becomes a natural dampener to incremental investment flows into that market.