FIIs remain sellers in July - Views on News from Equitymaster

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FIIs remain sellers in July

Jul 13, 2000

The much-anticipated rejuvenation of FII interest in Indian stock markets has proved baseless. After having been net sellers to the extent of Rs 9.4 bn in June, FIIs so far in July have made further net sales of Rs 1.1 bn. Why should FIIs remain sellers? Or alternatively, why aren't FIIs investing in domestic stock markets? There could be a number of explanations for this, the key one being disenchantment with the speed of second phase of reforms, which includes privatization of PSUs. The alternative reasons that could be forwarded are the relative attractiveness of other global markets, threat of aggression in the subcontinent (although nobody talks of it), unattractiveness and the possibility of a crash on the US bourses (which would put redemption pressures on such funds).

The markets surprisingly continue to hold onto the gains recorded earlier in June, when FIIs first showed a sign of lack of interest. In a recent article we had highlighted that FIIs, mutual funds and momentum investors had been sellers. However since then momentum investors have returned with a vengeance and have added net positions of about Rs 6 bn (and this is on the BSE alone). Probably this is what is holding the markets (mutual fund investment figures are not available on a timely basis).

The key question is whether momentum investors would continue to go long in absence of support from FIIs and mutual funds. This is unlikely, as ultimately momentum investors look at offloading their large positions in the markets. And if there is buying support from FIIs, momentum investors would either have to hold onto such positions (there will be an opportunity cost) or offload them into the market at a loss.

The present trend where FIIs and mutual funds are sellers and momentum investors are large buyers is probably unsustainable. In coming weeks what the FIIs do would be a key determinant of coming trend in the markets.

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