The Telegraph
Since 1st March, 1999
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Retreat signs on FII front

Mumbai, Sept. 22: Foreign institutional investors (FIIs) ' the main group of investors who have funnelled money into Indian bourses over the past year ' have slowly started to take some of the money off the table.

The FIIs have started to unwind their positions in the futures and options market even though they have remained firmly invested in the cash market.

On Wednesday, the FIIs were net sellers to the extent of Rs 517 crore in futures and options market and Rs 608 crore in the Nifty futures. The Nifty September futures are quoting at a 5 per cent discount to the cash segment and the October futures at about 19.5 per cent ' an indication of the way the markets may head into the future.

The FIIs have been saying for some time that the market is overextended and ought to see a sharp correction. But they have been confounded by the way the market has spiralled upwards ' until today’s sudden and sharp correction.

One of the first ones to talk about a deceleration of the bull market was Citigroup India, a bulge-bracket investor in Indian markets.

In a report titled, ‘Earnings outlook ' Deceleration ahead’, the research wing of Citigroup said: “One of the key factors behind the spectacular re-rating of the Indian equity market has been strong earnings growth, which averaged over 25 per cent for the last four years up to financial year 2005.”

“While we expect solid double digit growth to continue even on that high base, our bottom-up forecasts suggest a significant deceleration over the next 12 to 18 months,” the report stated.

In fact, two other blue-blood foreign broking houses, UBS and CLSA, had forecast a correction but had to eat their words till today as the correction never took place. Instead, after the sensex touched 8000, it took just eight days for it to add another 500 points.

“The runaway rally in Indian equities in recent months have been driven by massive money flows, rather than any big change in earning expectations,” Citigroup said in its September 19 report.

India’s earnings revision index has been in positive territory, but not very significantly. The run-up in the market without being backed by earnings revisions has pushed up the market “20 per cent beyond our fundamental fair value”.

In an undertstatement of sorts, Citigroup predicted, “As we expect earnings growth momentum to moderate in coming quarters, the challenge of sustaining the market at an overvalued level will become tougher and require a scale of flows as high as in the recent past, if not higher.”

The trend in the futures and options is a clear sign of the way FIIs will go from here. The Nifty September futures traded at a small discount to the spot price on Thursday. Nifty September futures settled at 2472.05 compared with the spot closing at 2476.50.

But the FII action in the spot market could deceive many who track their investment patterns. On Wednesday, when the markets went on roller coaster ride only to recover later, it was the FIIs who came out to buy shares. FIIs made net purchases of Rs 307.60 crore on Wednesday, most probably at lower levels.

The net inflows of FIIs this month is about Rs 4056.40 crore in Indian equities, lending credence to the view that they still find some value in the Indian markets.

Meanwhile, the NSE today said bank guarantee can be issued only on the basis of an arrangement with or counter-guarantee of another bank.

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