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FIIs continue selling spree

Rajesh Abraham

Domestic funds remain net buyers; Foreign funds sell in F&O too

Mumbai , May 31

Foreign funds continued their selling spree on the Indian stock market ending May 2006 with their biggest ever single-month net sales after the market was opened to foreign portfolio investment in the early 1990s.

Significantly, foreign funds have also turned net sellers in the futures and options (F&O) segment, likely indicating further market correction, dealers said. On Tuesday, FIIs were net sellers for over Rs 600 crore in index futures.

According to SEBI data, since the market peak of May 11, 2006, FIIs have pulled out some $2.5 billion from the Indian equity market, almost half of what they brought in the first five months of this calendar.

Taking into account the provisional figures filed with the NSE, total net sales by FIIs in May would be roughly $1.8 billion.

Foreign investors have been net sellers in emerging markets in the last two weeks with Korea and India accounting for most of the over $5 billion outflows.

The previous biggest single month net sales had occurred in October 2005, when net sales by FIIs stood at $ 840.90 million (Rs 3,613.90 crore).

In May 2004, FIIs had been net sellers for $780.90 million (Rs 3,436 crore).

Even after the massive sell-off in India, the FIIs are net buyers in this calendar by about $2.5 billion, which is over and above the $10.7 billion net purchases in 2005 calendar.

The sell-off by foreign funds in India is in line with their strategy to go `underweight' on the country due to "stretched valuations" and better opportunities in other markets, say analysts.

Further, FIIs have been aggressive sellers in all emerging markets over the last two weeks, as rising US rates offered `risk free' returns to foreign funds.

"We feel investors are being betrayed by high earnings growth projections and macro risks are being ignored. Equally, the large issuance of equity by companies looks set to dampen ROE — normally a good indicator of a peaking in equity markets. We believe Indian equities have far further to correct compared to regional peers, and thus remain bearish, with a lean towards Taiwan as an alternative," analysts at Nomura International, said in a recent note to investors.

Significantly, mutual funds were trying to match foreign funds on a day-today basis for the last two weeks, courtesy the huge collections through the recent New Fund Offers.

According to SEBI, mutual funds have been net buyers to the tune of over Rs 6,400 crore in the last couple of weeks, compared with over Rs 11,139.40 crore net sales by foreign funds in the same period. However, industry officials point out that it is unfair to compare domestic funds with foreign funds, both in terms of money power and the profile of investors.

"I don't think it is correct to compare mutual funds with FIIs. We cater to domestic investors, who have different expectations, compared to FIIs whose investors need to insulate their portfolios from global uncertainties," Mr Sanjay Sinha, Head of Equity, SBI Mutual Fund, said.

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