While setbacks in the global markets have been blamed for the current slump in the domestic equity markets, indications are that Indian markets are the least preferred now by foreign institutional investors, even among emerging markets.
Several large investing houses have gone underweight on India and are expected to continue to sell in India for the next year, while remaining positive on other emerging markets.
Though FIIs remain convinced about the fundamentals of the Indian economy and the growth potential of corporates, they are not willing to put their money on this, currently.
A Merrill Lynch survey of fund managers in the Pacific Rim says that while Korea remains the favourites of fund managers and Taiwan continues to see positive inflows, fund managers are looking at further underweight positions on India over the next 12 months.
In fact, India, along with New Zealand and Australia are expected to witness the largest selloff by fund managers, according to this.
Other emerging markets in the region, including Taiwan, Thailand, South Korea and Indonesia, are expected to garner positive inflows. Global funds are big drivers of liquidity now.
If the increase in US Fed rate is much more, then there could be a reversal of liquidity and India would not be immune to this, said an analyst from UBS Securities.
FII liquidity has been one of the major factors in the bull run in the Indian markets over the last three years. Foreign funds brought in $10.7 billion during calendar 2005, and so far this year they have been net buyers of $4.42 billion.
Market experts believe the run-up in the market from the 6500 level in the Sensex has been primarily owing to interest from international funds. If the trend reverses, there could be a significant impact on bourses, according to them.
While foreign analysts are saying that there may not be a big sellout by FIIs immediately, higher inflows are unlikely.
"There are some far eastern funds that have collected some money to invest in the Indian markets. But if the large US and European players decide to stay away from our markets now, the impact on net inflows could be significant," said an analyst with a large broking house.
With the US Fed rates remaining a big concern, no one is ready to hazard a guess on how big the slowdown of liquidity in India is likely to be.
What is clear, however, is that for now the Indian party is on pause, even though the neighbours' music is still playing.
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