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Outflows driven by ETFs; trend may continue in Dec: Quant

Rishav Dev, Equity Strategist at Quant Capital – Institutional Equities, sees some outflow from debt funds due to rupee depreciation. He however had expected equity funds to pick up in the last few weeks of November, which has not happened. “USD 17 billion inflow into India this calendar year is not bad but I had expected it to cross USD 20 billion,” he told CNBC-TV18.

According to Dev, the outflow has been largely driven by ETFs. “In the last couple of days we have seen Indian funds domiciled in US booking profits here. At this point in time, it is largely driven by hot money, which has gone out of the market in the last 5-6 days,” he said, adding that he sees the trend continuing in the last few trading sessions in December.

Below is the transcript of Rishav Dev’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18.

Ekta: I am going to ask you about the debt versus the equity flows on a holistic or larger year-to-date (YTD) perspective. We have seen the debt flows from the foreign institutional investors (FIIs) surpass equities this year on YTD basis at current reckoning. In your sense do you think that this was an aberration limited to this year? What led to it and do you think it will continue next year?

A: Whether it will continue next year it is difficult to gauge at this point in time because the way the rupee has acted in last couple of days we have already started seeing outflow from the debt funds. USD 25 billion window which had a free debt utilisation limit had already reached 99.5 percent couple of days back now it is at 98 percent. 

So, outflow from debt funds have already started. We saw a similar trend last year when the rupee fell from 55/USD odd levels from mid of May to mid September. This is a same time we have seen huge outflows from bond funds. That this point in time it is very difficult to say whether we will see the same kind of debt funds in next year it is too early to say. 

Having said that to be honest I had expected equity flows to pickup in the last few weeks of November and December that has not happened. USD 17 billion of inflow into India in this calendar year is not bad but my expectation was that it would cross USD 20 billion. However, the global scenario as it is right now, the reason for FIIs to invest in India that reasons are no longer in the short-term does not seem to be valid as of now. That is why we have seen outflows from India in the last five days. 

Anuj: Any early signs of the outflows from Indian market where what kind of fund would have withdrawn money. Would it be largely the hot money the exchange-traded fund ( ETF ) kind of stuff that would have booked profits?

A: It is largely driven by ETF so in the last couple of days we would have seen the Indian funds domicile in US. Those funds taking booking profit in India at this point in time. It is largely dominated by the hot money which has gone out from the market in the last five-six days and I see the trend continuing at least for the last few trading sessions in December where in more hot money could go out of India.

Ekta: Where is the money being reallocated to? Where are we seeing incremental inflows asset classes geographies when we are seeing outflows? 

A: Across the board we have seen outflows except money markets funds on a global level. Last week data suggested that we have seen outflows from developed market, emerging market, high yield bonds so every asset class across the board is seeing outflows except money market funds in US. This attracted inflows to the tune of USD 2.2 billion last week.

On an interesting note one of our ETF indicators it came in the sell zone on November 26 th and we had advised clients at that point in time to be cautious on global equities that it might correct 4-6 percent in the next few weeks. Having said that the trend in US is such that we have seen heavy outflows last week but majority of the outflow were linked to funds going ex- dividend which I expect this week to materialise into inflows in the coming week.

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