Foreign portfolio inflows may dip in the current quarter on expectations of a poor-margin guidance from technology companies. The forthcoming MSCI Standard Index annual review, expected in mid-May, is also likely to trigger a reduction in exposure to India.
Analysts expect technology stocks, which are a part of the MSCI Index for India, to make way for banking and finance stocks. The overall weightage of Indian companies under the index may also go down.
"FIIs are worried about the negative returns India has posted after the war in Iraq was over. The negative performance of India vis-a-vis other emerging markets and the underperformance of the components of MSCI India may well trigger lack of higher investments in the near future," Vipul Dalal, COO (Institutional equities business), IL&FS Investsmart, said.
Indian markets have lost about 2 per cent in the last fortnight against gains in other markets such as Korea, Indonesia and Israel which have posted double-digit returns.
FIIs have turned net sellers in equities after Infosys Technologies gave a lower guidance and posted lower profits. "Investors were shell shocked," Dalal said.
Investor interest is marginally creeping back. But it may not be as much as prior to the annual results made by technology companies. "It was a panic reaction. Investors may, however, return to technology stocks if other sectors post comparatively lower profitability," an analyst said.
"A similar knee-jerk reaction was witnessed a couple of years back when technology companies gave a guidance of profitability in the range of 30 per cent, lower from 50 per cent in previous years.
The interest waned for a few months and again investors returned on realising that even at 30 per cent technology was one of the highest profitable industry," Dalal said.
Yet, the fact remains that since Indian companies, which have high exposure to US, may not regain ground unless the US economy sees an upturn.
Thus far in calendar 2003, FIIs have made a net investment of Rs 1827.7 crore (Rs 18.27 billion) with purchases of Rs 15056.20 crore (Rs 150.56 billion) and sales of Rs 13228.50 crore (Rs 132.28 billion) in equities.
HDFC, ICICI Bank, Infosys Technologies, Ranbaxy Laboratories, Satyam Computer and Tata Tea are among the sensex stocks in which FIIs have increased their holdings during the year ending March 2003.
The FIIs have reduced their holdings substantially in BSES (from 2.81 per cent to 0.96 per cent), Grasim Industries (from 23.94 per cent to 14.1 per cent) Gujarat Ambuja (from 19 to 14.96 per cent) HDFC Bank (from 30.23 to 23.26 per cent) Hindalco (from 20.12 to 11.65 per cent) Larsen & Toubro (from 7.69 to 3.39 per cent) State Bank (from 19.37 to 11.43 per cent) among others in the last financial year (2002-2003).
FIIs bought an additional 183 million shares of public and private banks in fiscal 2003. This entailed a transfer of a good Rs 2,200 crore (Rs 22 billion) into the banking sector. As a result, FII investment in bank stocks has gone up from Rs 5,035 crore (Rs 50.35 billion) in March 31, 2002 to Rs 7,235 crore (Rs 72.35 billion) as on March 31, 2003.
Foreign investors have displayed their preference for banking and finance stocks in the last financial year and it is expected to continue, especially in the public banks on expectations of a higher FII limit.
Last year, FIIs increased their holding in ICICI Bank from 22.3 per cent in March 2002 to 38.4 per cent at the end of March 2003. FIIs preferred public banks over private banks by increasing their exposure to small and medium cap banks such as Andhra Bank, Bank of Baroda, Bank of India, J & K Bank, Oriental Bank of Commerce and Punjab National Bank.
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