By Ruma Dubey

There is a general perception that all foreign investors – Foreign Institutional Investors (FIIs) as well as Foreign Direct Investments (FDI) are beating a hasty retreat from India. Their love for India is all lost in the quagmire of politics, lack of reforms, inflation, falling growth rate and general apathy from all ends. Someone said that the “I” in BRIC has fallen off. Now isn’t that being too dramatic?

This fear stems from statistics. Based on the figures put out by SEBI on FII investments, till end of May, buying exceeded selling but from June, the trend has reversed. In June’13, net sales exceeded buys by Rs.11,425 crore, in July’13 by Rs.414 crore and in August’13 by 7470 crore. But in the month of September, till 13th of Sept, Rs.5817 crore worth of equity purchases exceeded sales. FIIs have purchased shares worth a net Rs 66463.30 crore in 2013 so far (till 13 September 2013) v/s purchases worth Rs 128359.80 crore in calendar 2012. At present, there are a total of 1,748 foreign funds registered with the SEBI.

We all know why the FIIs are selling – the inevitable QE tapering. By tomorrow night we expect to know the quantum and the time frame of the tapering and there is bound to be a reaction. So does it mean that FIIs will pack their bags and bid adieu and scoot from India? Unlikely. FIIs simply cannot afford to move out lock, stock and barrel out of India as the opportunity that the country presents it too good to ignore. What we are witnessing now and will see in the coming days, will be a very logical reaction to tapering. It does not mean that they are getting out due to systemic issues.

And the pointer to this fact is FDI inflow, which is the real measure, more than FIIs pumping “hot money” into the stock market. FDI inflow increase indicates that they still find attractive enough to make some long term and much bigger commitments. As per the data released by ministry of commerce and industry, FDI into India increased by 6% (YoY) to US$10.87 billion during the first six months of this year – Jan to June 2013. FDI inflow was into hotels and tourism, pharmaceuticals, services, chemicals and construction. Most of the inflows came from Singapore, Mauritius, the Netherlands and the US. There is news today that Japanese car maker Mazda is planning to return to India and make the country as its export hub. Ikea is in a frenzy to set shop.

Thus when the Federal Reserve announces tapering tomorrow, is there a real fear of our Indian markets crashing through the floors of trading? Logically, a crash into a bottomless pit will not happen. Two factors support this belief. Firstly, when stimulus was withdrawn in 2010, the world economies were fragile, still hurting and nursing the wounds inflicted by the collapse of Wall Street. This time around, economies are showing signs of resurgence though Europe continues to limp and more importantly, the US economy is also slowly but surely getting back its vigor. It will take a while for growth to take off but at least it’s not a death knell situation any more. Yes, when QE gets withdrawn, there will be a reaction but it will not be a crash. If the market looks at the end of QE as a sign of confidence building up in the economy then the rally could indeed continue. Also one has to remember, it is not the money from Fed alone which drives stock prices – it is corporate performances too and individual companies have started showing better profits and margins, thanks to various cost cutting measures and improving production efficiencies. This means hard times have made companies leaner, fiscally more prudent and efficient.

One can brush off this logic as too Utopian but then the second factor more or less will drive home the truth. Let’s take the case of US Treasury. The US ‘prints’ $85 billion per month and that means it is buying bonds of this value per month. When FIIs get the money, they put it in emerging markets to take advantage of the arbitrages. When the money goes to that country, say, India, it will come in the form of dollars which will be with RBI. Now it is foolish to let so much money sit idle, so RBI utilizes this money itself to buy US Treasuries. So money comes from USA and goes back there.

As per the US Treasury records, in April’13, India held $53.5 billion worth of US Treasury Securities. India has been bringing this holding down consistently, from a peak of US$60.6 billion in August’12. Yet, it remains higher than US$49.3 billion held in April’13. China remains the number one holder – till end of April’13, it held US$1264.90 billion worth of US Treasury securities. Japan comes in second place, holding US$1100.30 billion.  (Take a look at the major foreign holders of US Treasury securities - http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt)

So when the FIIs start exiting, the RBI would need to give them back their money and to raise money, naturally, it will have to sell its US Treasury holdings.  Can you imagine what will happen to US if India, China and other economies, all start selling the Treasury securities, even if at a loss? The US economy could collapse. Now that is something which the Fed will not allow to happen. And that brings us to the conclusion – the easing of QE will not lead to stock markets crash; thus the Fed will ensure, for the safety of its own economy, to ease this QE in a slow and gradual way. For eg: if it is pushing $85 billion per month, this could be cut down by 10% first, then maybe another 10-15% and so on. But it will not be a complete stop at one go. That would be disastrous for the entire world.  And this is what the Fed is likely to convey in the FOMC meet – when and how much.