FII inflows may dry as Fed pulls liquidity

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 FII inflows may dry as Fed pulls liquidity
In 2013, Foreign funds made substantial purchases in Indian equities to the tune of Rs 1.13 lakh crores. Interestingly, this was against the backdrop of a falling rupee and weak economic fundamentals.

The one reason for such buoyant flows was not India's economic fundamentals, but, the fact that there was ample liquidity in the global financial system. You have to invest when you have money around, despite weak economic fundamentals.

The US Fed was buying assets at $85 billion a month, pushing liquidity into the US and hence the global financial markets. The Japanese Central Bank was doing the same and the ECB was also following an easy monetary policy.

A lot this provided impetus to emerging markets including India, as money in the global financial system was overwhelming. But, now the situation is getting a little tricky.

In the last two months, the Fed has already pulled back $20 billion a month from its $85 billion asset purchase programme. This means that easy liquidity, which found its way into emerging market stock markets is not going to be easy any longer.

Also, foreign funds, which were flush with money may have less money now, than they had in 2013.

Implications for the stock market

What this means is that if the Indian economy does not show robust growth and if Indian corporate results are not up to the market, foreign funds are not going to chase Indian equities. Earlier, they chased Indian equities despite poor fundamentals like rising interest rates, elevated CAD, low economic growth and high fiscal deficit. That is not going to be the case any longer, as liquidity from the US Federal Reserve has begun drying up.

Also, at least until the elections, we are not going to see FIIs rushing to buy. It's now going to be a case of FIIs chasing fundamentals as liquidity has eased.

Read more about: fiis, liquidity, us fed, ecb, cad
Story first published: Saturday, February 1, 2014, 10:54 [IST]
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