The US Federal Reserve Chairman, Bernanke, did more than signal a cut back in monetary stimulus. He brought back memories of the massive sell-off by foreign institutional investors (FIIs) in 2008 in our own equity markets. Why?

The Federal Reserve in the past five years has been pumping money to revive the battered US economy. The $85-billion monthly bond buying programme of the US central bank has been a source of liquidity for global markets. Now, amid signs of recovery in the US economy, investors world over are jittery.

Most markets and asset classes in the world have gained momentum in the last few years backed by the money infused by the Federal Reserve’s quantitative easing programme. Hence, plugging this bounty would mean FIIs pulling out money from emerging markets soon. A depreciating rupee too did little to keep the FIIs from exiting the Indian market.

A weaker rupee implies lower returns (in dollar terms) for overseas investors on their Indian investments. Besides, there has also been other macro concerns such as inflation and high current account deficit, dampening the market sentiment in India.

During the month of June, FIIs emerged net sellers (sales exceeding purchases) of equity and debt with net outflows of Rs 11,027 crore and Rs 33,135 crore in the respective markets.

WHO ARE THEY

FIIs are entities established or incorporated outside India permitted to invest in the Indian market. As part of the reform measures in the early 1990s, FIIs were allowed to invest in the Indian market, to create foreign inflows.

An FII could be a foreign central bank, a sovereign wealth fund, a mutual fund, an insurance company or a pension fund. They can invest both in the equity and debt market.

Investments in the debt market are subject to limits. FIIs can now invest up to $30 billion in government debt and up to $51 billion in corporate debt market.

During the global financial crisis of 2008, FIIs sold close to Rs 53,000 crore in Indian equity markets. The trend soon reversed from the beginning of 2009, as the US Federal Reserve started its quantitative easing programme. Cumulatively they have invested close to Rs 4.2 lakh crores in Indian equity markets, between 2009 and now, which is 65 per cent of the value of equity investments held by FIIs today.

During 2012-13 alone, FIIs were net buyers to the extent of Rs.1.4 lakh crore, the highest ever inflows seen during a year.

Money pumped into the global financial system by central banks was a source of inflows into India. Reforms initiated by the Indian government to boost growth too created a positive market sentiment.

SEBI welcomes FIIs

Besides, with the growing uncertainty in European markets, FIIs continued to invest in emerging markets such as India.

The debt market too caught foreign investors’ interest and started to see significant investment from 2010 onwards. The FIIs have invested close to Rs 1.5 lakh crore in the debt market till date.

At a time when the Indian markets are grappling with the steep fall in rupee and aggressive selling by foreign investors, the Securities and Exchange Board of India wheeled in a new set of norms to ease in entry of foreign investors. Based on the Chandrasekhar Committee recommendations, SEBI has approved a single window for all categories of foreign investors, clubbing together FIIs, sub-Accounts and Qualified Foreign Investors. Categorised as Foreign Portfolio Investors (FPIs), this would include investments not more than 10 per cent of equity in a company.

Uptil now, each investor category was subject to different investment limits and regulatory requirements. Also, with the delegation of registration of FPIs to the designated depository participants, the entry process is expected to quicken. FIIs have pulled out close to $7.5 billion from Indian markets in the last month. While the move will simplify processes, macro concerns need to recede, to trigger FII inflows.

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