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Offshore funds unfazed by Indian stock market crisis

A recent wave of Indian stock market scandals has rattled domestic investors, but has not caused foreign investors to pull out of the market in substantial numbers, information compiled by the Reserve Bank of India shows.

Foreign investors have remained net buyers of Indian stocks, pumping $901.8 million into Indian equity markets since the market slide began on March 1.

Foreign investors now have $13.5 billion at risk in Indian stock markets, which have plummeted the past month in reaction to settlement payment problems and a blizzard of insider trading and share price manipulation scandals.

Since March 1, the Bombay Stock Exchange's 30-issue Sensitive index plummeted by 17.8 per cent to 3605.01 by Tuesday's close.

As the decline accelerated, criticism has grown that the Securities and Exchange Board of India (Sebi), exchange management boards and the Reserve Bank of India (RBI) are to blame for failing to properly police the nation's financial markets.

But foreign fund managers say weak regulation is widely viewed as an emerging market risk, and that explains in part why so many foreign investors have chosen to ride out the crisis.

"The regulations are important in investment decisions, but it is not overwhelmingly important," says Jeff Chowdhury, director of F&C Emerging Market in London, which has nearly $300 million invested in Indian assets.

Avinash Vazirani, chief investment officer for south Asia and Africa at BNP Paribas Asset Management with $75 million in Indian assets, said that Indian mutual funds traded at a discount because of the market's lack of transparency.

"One always feels that there is something not quite right, processes are not transparent, hence you give a discount to the true market value."

INFLOWS COULD SLOW DOWN

Some fund managers believe, though, foreign investment in Indian stock markets is likely to tank, partly because of the recent scandals.

"Foreign funds may avoid the market for a few months...the revelation of the last few days is going to shake up a lot of people when they sit down and analyse it," Vazirani said.

But there are other reasons too.

Portfolio managers say the general slowdown in global technology demand is expected to hurt the Indian software sector, while growth in domestic industrial production is expected to slow from eight percent last year.

"We think the Indian market has not bottomed out yet. The technology companies, which constitute a large share of any foreign portfolio, will continue to underperform," Chowdhury of F&C said.

"Second on the global outlook for stocks, we see a reversal in the global economy only by the second half. So there could still be some downside left," he added.

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