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OP Thomas: FIIs turn aggressive sellers of debt and equities
November 21, 2016
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Exclusive to The Gulf Today

For the last five weeks, the benchmark index, Nifty-50 has been on a declining mode, losing about 6.5 per cent from 8629 to the present level of 8070.

First it was the US Presidential election that triggered a global sell-off after Donald Trump won the polls and second factor that added to the domestic woes was the Indian government’s decision to demonetise Rs500 and Rs1000/- currency notes on November 8.

Performance

While the markets globally have discounted the US polls and now are focussed on Fed rate decision mid-December, back home the market has begun discounting the Q3 corporate performance owing to the demonetisation drive that has led to a temporary cash crunch across segments.

Though temporary, the cash crunch has been severe and vendors have been hit on the one side and on the other hand, consumers too have been cash starved due to the limit imposed on cash withdrawals by the government.

In fact the Supreme Court of India has warned of a revolt by the masses if the government does not immediately address the liquidity crunch of the common person who is unable to withdraw funds from saving bank accounts.

FMCG, auto, two-wheelers, readymade garments, luxury goods, home sales, are few of the segments severely hit by the cash crunch and the spill-over effect is also seen getting stretched onto the fourth quarter.

While the demonetisation move of the government has been hailed by industry leaders, what the government did not envisage was the tightness in liquidity condition, which has now hit the man on the street.

Farmers have taken to the street.

They have refused to deposit their produce like milk to co-operatives.

ATMs have gone dry because they are not configured to handle the new Rs2000/- notes. It is believed new Rs500/- and new Rs1000/-notes will also be launched but for that the ATMs need to re-configured and it would take a while before they start dispensing cash, which as of now is under forced custody of banks. Meanwhile, foreign institutional investors (FIIs) have turned aggressive sellers of both, debt and equities, this month.

So far, FIIs have net sold Rs86 billion in debts while in equities they been net sellers at Rs100 billion.

Domestic institutional investors, however, have been partially able to offset the FII selling with their net purchases at Rs75 billion since November 1, though they remain bearish on debt with net selling at Rs73 billion.

Emerging markets

With markets focussing now on Fed meet on December 15, a rate hike would lead to a major sell-off in emerging markets and India would be no exception. US Fed chair, Janet Yellen last Thursday hinted that the rate hike was due any moment. A Fed hike would imply stronger US currency and higher return for institutional investors like FIIs.

US debts

Hence FIIs are likely to pullout from emerging markets and park their funds in US debts.

Also the winter session of the Parliament has been a washout ever since it started last Wednesday. There was furore over the government initiative on demonetisation and demand for roll-back of the decision.

The crucial Bill related to goods and services taxes hence remains in a limbo as it needs the Parliamentary nod if the government has to implement it from the new fiscal April 1, 2017.

The week ahead is hence volatile and with the F&O expiry of November series falling due Thursday, intraday swings will be the order of the day.

The benchmark Index Nifty lost 2.52 per cent last week after opening the week at 8279 on Tuesday and closing Friday at 8070.

If the selling continues, Nifty is likely to breach the 8000 mark and the next support is seen around 7500-7800.

THE AUTHOR
IS A BUSINESS ANALYST COVERING

INDIAN MARKETS, BANKING AND ECONOMY

 

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