FII’s show renewed interest in India

FII’s show renewed interest in India

08 May 2019

There are many ways for a foreign investor to invest in a country. The most direct method, of course, is through the route of Foreign Direct Investment (FDI). However, there are other ways to enter an economy, like Foreign Institutional Investment (FII).

FII equity flows were negative in 2018 in EM’s, including India, on the back of a strong dollar and increasing yields in the US, lower rate hikes in EM’s and high crude oil prices. Amid stock market volatility, Foreign Institutional Investors (FII’s) saw a net outflow of $4.58 billion from India, the steepest sell-off in a decade. FII’s were net sellers in all major Asian markets, except China. In Asia, they sold the most in Japan, withdrawing $45.82 billion from equities in 2018, as US assets became more attractive. Indian equities continue to outshine their Asian peers in drawing overseas funds, upending the maxim that uncertainties about the outcome of the world’s most extensive polling exercise should cause cash inflows into Mumbai to dwindle.

Foreign investors passively hold most foreign portfolio investments that consist of securities and other foreign financial assets. These investments can be made by companies, individuals or even governments in international countries. Grouping of assets such as bonds, cash equivalents and stocks is termed as Foreign Portfolio Investment. An investor or a financial professional can easily handle portfolio investments. Investors utilizing foreign portfolio investments can avail benefits such as portfolio diversification, international credit, exchange rates and access to a larger market. The return on foreign portfolio investment is normally in the form of interest payments or non-voting dividends. Let us understand FII’s in brief as follows:-

Foreign Institutional Investors (FII)

Foreign Institutional Investors (FII’s) are an investment fund or a gathering of investors. Such a fund is registered in a foreign country. Such institutional investors mostly involve hedge funds, mutual funds, pension funds, insurance bonds, high-value debentures, investment banks etc. FII’s play a big and significant role in the development of our economy. The quantum of funds that they invest is considerable. Therefore, when such FII’s buy shares and securities, the market is bullish and trends upwards. The opposite may also happen when they withdraw their funds from the markets. So, they have considerable sway over the market.

Advantages of FII’s

  • FII’s will enhance the flow of capital in the country
  • These investors generally prefer equity over debt. So, this will also help maintain and even improve the capital structures of the companies they are investing in.
  • They have a positive effect on the competition in the financial markets
  • FII’s help with the financial innovation of capital markets
  • These institutions are professionally managed by asset managers and analysts. They generally help in improving the capital markets of the country.

Disadvantages of FII’s

  • The demand for the local currency (Rupee) increases. This can cause severe inflation in the economy.
  • These FII’s drive the fortunes of big companies in which they invest. But their buying and selling of securities have a huge impact on the stock markets. The smaller companies are taken along for the ride.
  • Sometimes, these FII’s seek only short-term returns. When they pull their investments, banks can face a shortage of funds.

If we consider Asian and Emerging Market (EM) economies, then India has been one of the highest recipients of foreign flows. Last year, the Foreign Portfolio Investors (FPIs) applied brakes on their investments in India. But FPI’s are once again looking at the country aggressively. FPI’s mounted aggressive bets on the country due to a growth in the earnings and hopes of an improvement in macro conditions. So far this year, higher FPI flows have been garnered by India as compared to Taiwan, South Korea and Indonesia. As per the experts, the liquidity surge has more to do with central bank actions and less to do with fundamentals. Investors in India can generate good returns because India is emerging as one of the more attractive emerging markets.

In this year, FPI flows gathered momentum in March after turning sharply positive in February and continued in April. The positive FPI flows trend is likely to continue close to the election date.

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