Foreign funds pull out Rs 19,000 crore from Indian equities in first 9 months

Foreign funds have withdrawn over $4 billion, or Rs 19,000 crore, from Indian equities in the first nine months of 2011 due to higher risk aversion, soaring inflation, policy paralysis and earnings downgrades.

“Huge redemptions are due to poor performance of equities. Redemptions are not causing poor performance of the market, poor performance is causing redemptions,” said Samir Arora, fund manager at Helios Capital Management.

“For Japanese investors, losses are even higher since the rupee has depreciated even more against the yen,” he said. The Indian market has fallen more than 18% since January. However, despite the fund pull-out, India-focused foreign funds have investments worth $50 billion as of August, according to Simfund Global data. In the three months starting July, $23,324 million was redeemed from EMs while funds redeemed $1,868 million from India, according toEPFR data.

While equity funds see a pullout, Indian bonds are garnering good interest from overseas funds amid a rise in short-term yields. Bank CDs have been trading in a range of 8.75-9.50% over the past six months. Foreign portfolio investors have net bought bonds worth Rs 300 crore this year.

“Indian bonds and rupee investments have been in demand among global investors, especially Japanese investors,” said Bryan Liu, director of Simfund Global. “Investors are showing interest in select EM fixed income and currency products, including Brazilian real and Chinese renminbi,” he added.

HSBC GIF Equity, iShares MSCI India, JF India, Matthews India and Lyxor ETF MSCI India are among India-focused funds that have seen huge redemption since the beginning of this year. HSBC GIF has seen outflows worth $982 million, while iShares MSCI India, JF India and Matthews Indian have seen pull out in the range of $345 and $365 million.

However, domestic fund managers – many of whom advise offshore funds on their India portfolio – are hopeful of investments returning to Indian shares once the market turns around.

“Uncertainties in global markets and higher risk aversion are forcing investors to redeem their India investments,” said A Balasubramanian, chief executive of Birla Sunlife Mutual Fund.

“Foreign funds are quite tired of the prolonged wait for Indian markets to fire up. Inflation, higher interest rates and lower earnings are other factors worrying foreign investors,” he said.