Overseas investors play the market a lot more than SEBI data show

RBI numbers point to even bigger swings.

Source : Business line :Lokeshwarri S.K:BL Research Bureau:Chaeeai:sep 20,2010

If investors went by the SEBI data alone, then it would seem that Foreign Institutional Investors (FIIs) pulled out almost $12 billion from Indian equity in 2008, making equity prices spiral down hopelessly. But, do you know that depletion in portfolio investment of external investors was a more staggering $34.8 billion in that year, according to the RBI data on such investments?

The numbers put out by SEBI are widely followed, because the data are published every day, making it a major sentiment-driver in the Indian stock market. On the other hand, the International Investment Position (IIP) report published by the RBI is quarterly and comes with a lag of one quarter, thus giving it little short-term interest.

As the above-mentioned figures show, portfolio investments by FIIs reported by the RBI at the end of every quarter, and the cumulative FII investment reported by SEBI on the same date, invariably differ as shown in the adjacent graph. The difference tends to widen in times of greater volatility and is narrower in more sedate periods.

In 2007, the year of the raging bull market, FII investments in equity increased by $43 billion, according to the IIP report. SEBI reported a more modest growth of $18 billion in that period.

The sharp appreciation of the rupee in 2007, RBI's apprehensions about managing humungous inflows, SEBI's clamping down on overseas derivative instruments et al, can be understood better against the backdrop of RBI's numbers than against SEBI's.

In the quarter to June 2009, when stock prices rose vertically after the UPA Government came to power, the IIP report showed a jump of $12.5 billion in FII portfolio position, while the increase in FII investment, according to SEBI, was half that number, at $6 billion.

Again, if we consider the quarter to December 2008, when the credit crisis was the most acute, following the Lehman collapse and hedge funds going on a selling spree, IIP reported erosion in FII position of $9.2 billion while SEBI reported a much lower number at $3.3 billion.

Why different

The most important reason for the difference in the numbers reported by RBI and SEBI is that they differ in the point of capture. While the IIP report is based on the transactions put through by FIIs in their custodial accounts held with banks and hence the inflow or outflow is captured when the money enters or leaves the country, SEBI data arebased on the actual purchase and sales of securities in primary or secondary market.

It is, therefore, possible that un-invested funds lying in custodial accounts would account for part of the difference. Profit booked by FIIs in the stock exchanges that have not been re-invested would also increase the FII portfolio investments as reported by the central bank. Similarly, losses booked in stock exchanges would deflate this number.

The other reason for the difference is that SEBI data captures only fund flow in to cash segment of the exchanges and does not account for the margin money that FIIs hold for trading in derivatives. This portion of FII funds is short-term money and could see greater inflow and outflow in times of turbulence. Fluctuation in the Indian rupee could be yet another cause for this disparity.