For any stock market fall, Foreign Institutional Investors (FII) become the prime suspects. But this time it is different. Contrary to popular belief, FIIs have been net buyers in the secondary market in the ongoing correction.

The equity market has been in doldrums since November 2010, with the benchmark Sensex losing 16 per cent since then. But data from market regulator SEBI show that foreign investors have made net purchases of $3 billion in the secondary market since last November. Net purchase this calendar equals $482 million.

RBI report

That foreign institutional investors have not pulled out big money from the Indian market in this period is also corroborated by another set of data on international investments put out by the RBI (International Investment Position) The report captures, among other things, foreign portfolio flows when they enter or leave the country through custodial bank accounts operated by FIIs.

According to this report, outstanding foreign portfolio investments have increased from $130 billion at the end of September 2010 to $141 billion on June 30, 2011. The increase in the first six months of this calendar was $3.4 billion.

This is in stark contrast to the behaviour of FIIs in previous market corrections. In the year 2008, the RBI”s International Investment Position report showed a reduction in foreign portfolio investments of $34 billion. According to SEBI, net FII selling in the secondary market was $12 billion in that year. In the short correction in May 2006, too, both the RBI report and SEBI data recorded substantial outflows.

What has changed?

The difference in the behaviour of the FIIs this time around can partially be explained by the ongoing turbulence across the globe with many European nations on the verge of bankruptcy, dollar appearing shaky after the recent S&P downgrade, economic contraction in China, and the inflationary pressures in emerging markets. Lack of other lucrative avenues of investment could have prompted FIIs to stay put.

It may be recalled that FII oversubscription in Coal India IPO had totalled $26 billion last October. There was expectation that the money refunded would be ploughed into the secondary market. Surprisingly, most of this oversubscription appears to be in the country still. The expectation that stocks can be bought cheaper at a later date could have prevented an exodus of these funds.

FIIs in derivatives

An analysis of FII activity in the cash and derivative segment in the first three quarters of 2011 throws further light on FII action. While the turnover registered by these investors in the cash segment has remained stagnant when compared to the first nine months of 2010, the derivative turnover has jumped sharply.

It is possible that foreign investors are using some of these parked funds to play market volatility through derivatives. FII activity in index options and stock options is up 88 per cent and 35 per cent this year over the same period last year.

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