Domestic markets will be swayed by the action of India-focussed funds that are operating from outside the country. Already foreign funds have started to pull out, albeit marginally, from India ever since the DMK — one of the key constituents of the Government — withdrew its support.
A sudden withdrawal by foreign investors can trigger a panic selling in the market, as witnessed in 2008. The Indian benchmark indices lost over 50 per cent after FIIs pulled out $12 billion following the global financial crisis in 2008.
According to global fund tracking firm Morningstar, the assets of all India-focused offshore India funds & ETFs at the end of December 2012 was $37 billion.
Already reports of India-specific exchange-traded funds facing redemption pressure hit domestic equities, particularly from mid- and small-cap space.
According to EPFR Global – a fund flow and asset allocation tracking company – BRIC (Brazil, Russia, India and China) equity funds have recorded outflows in 107 of the past 119 weeks.
Even a small selling of Rs 212 crore worth shares by FIIs, gave nervous moments to the domestic markets. While their net investments stood at Rs 45,316 crore ($8.3 billion) in 2013 so far, they pumped in about $24 billion into Indian stocks during 2012. That was the second highest inflow registered in a calendar year by FIIs after 2010, when they had invested $29 billion net in Indian shares.
In addition to the risk of political instability, FIIs will also keenly watch the financial performance of India Inc.
Infosys had already disappointed the market with a weak set of numbers and lower guidance for the current fiscal.
The selling could engulf large-caps also, if these companies fail to meet market expectation.
However, Deutsche Bank is not perturbed by high degree of pessimism. According to it, a global rising tide, marked by an improving outlook in the US, China, Japan, and ASEAN, would help external demand and capital flows for India. “India simply cannot be negative beta in this context.”
It also added that a likely flat or declining path of energy and metals prices would ease the current account burden substantially and a combination of declining inflation and fiscal consolidation could well pave the path for an easier-than-expected policy rate trajectory. “With an election year looming, incentives are aligned for the Government to boost capital spending, which would likely support growth, ease liquidity, and support investment sentiment,” it further said.
Factors to watch
This week, Reliance Industries will unveil its Q4 results on Tuesday, HCL Technologies, TCS, YES Bank on Wednesday, IndusInd Bank and MRF on Thursday and Wipro is scheduled to declare its quarterly number on Friday.
The Government will announce wholesale price index data for March 2013 on Monday.
Trade policy slated to be announced next week on April 18 to get the sense of the Government initiatives to boost exports and alleviate the concerns pertaining to the widening current account deficit.