After net buying in stocks of more than Rs 40,000 crores in the first three months of the calendar year, the month of April is likely to see a negative inflow, unless the last day of the month sees some large scale buying by FIIs. Until, the compilation of today's data, the foreign net outflow was slightly under Rs 800 crores, which is in stark contrast to inflows of Rs 40,000 crores in the first three months.
The net outflow for the month of April suggests that foreign funds have suddenly turned weary over the Indian markets. In fact, these set of investors have too many concerns.
Firstly, they are not sure over General Anti Avoidance Rules (GAAR) and its tax implications over the short to medium term. If implemented, GAAR provisions will tax Participatory Notes, a major mechanism through which FIIs invest in the Indian markets.
Unfortunately, at the present moment we have a mechanism that is ambiguous and unclear, which is causing enough and more anxiety amongst foreign investors. Secondly, concerns over the widening fiscal and current account deficit have kept them on the sidelines. Foreign funds are also worried about the complete policy paralysis at the centre, which has possibly deterred them from making any large scale purchases in the Indian markets. To compound their misery is the falling rupee, which makes it more expensive to bring in dollars.
Recently, the S&P also reviewed India's rating and said that there was a one in three chance that India's rating could be downgraded. This too has left FIIs worried, which has resulted in selling pressure in Indian equities.