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Blasts, weak Budget, rating review make FIIs panic

Nikhil Faleiro in Bombay

It did not come as a surprise to many. But when the news flashed across screens in financial offices that Moody's, the international rating agency, was considering a possible downgrading of India's credit rating for foreign currency debt and bank deposits, the Bombay Stock Exchange panicked.

Within minutes of the market opening, the 30-share BSE Sensex dropped a massive 128 points as brokers tried to offload their positions before a possible downgrade.

Admits Asit Mehra, president of Nucleus Securities, "With the fear that India's rating, currently Baa3/Ba1 could be further reduced, scared brokers have chosen to offload positions. The slide was triggered by the large-scale offloading by foreign institutional institutions."

The FIIs were already jittery after the nuclear tests on May 11 and 13 and the economic sanctions. With the Budget only adding to their worst fears, the outflow of funds from the country has been on the rise. According to data released by the Securities and Exchange Board of India, the amount of money leaving the country in April was Rs 1.08 billion while in May, it shot up to Rs 6.13 billion!

The bearish sentiments all round impacted upon the Sensex today, which dropped from Thursday's close of 3546.21 to end Friday at 3417.89 points, a loss of 128.32 points.

Samir Arora, chief investment officer, Alliance Capital India Ltd, is critical of the Budget. "The Budget does nothing new for the Indian economy. In fact, it takes the economy back to 1991, which is bad for the economy and not attractive to the FIIs."

The possible ill-effects of the Budget is scaring the FIIs into decreasing their equity holdings in the stock market and re-evaluate their exposure in the Indian economy. According to reports, big players such as Morgan Stanley, Jardine Flaming, Schroeders Capital International and Lloyd George have all decided to reduce their investments in the country.

"This Budget will not kickstart the economy," warns Sanjiv Mehta, head of research at James Capel HSBC.

And with little incentive to invest in the country, the likelihood of more and more FII investment leaving the country is definitely going to rise. Corporate earnings show little possibility of rising while political chaos hangs like a Damocles sword over the present coalition government, only adding to FII anxiety.

The nervousness of the FIIs increases daily. And along with the anxious FIIs are the shaken brokers, who now expect the Sensex to dip below the 3000 mark.