Indian funds listed abroad cue future market trend

MUMBAI: The recent woes of the Indian stock market have been blamed on the US sub-prime crisis and its fallout on the financial markets. Crude oil, at $85-95 per barrel, was not much in the picture that time.

In its monetary policy review on July 29, Reserve Bank of India said that the domestic markets saw severe bouts of volatility from January this year due to heightened concerns over the severity of sub-prime lending crisis in the US and its effect on other market segments and in other countries.

Contributing to the cautiousness were the downward trend in major international equity markets, an increase in international crude oil prices, and other sector- and-stock-specific news, the first quarter review said.

But was the January 21 fall of the India markets waiting to happen or did foreign funds see it coming?

The sudden fall in net asset values of Indian funds listed on the US bourses just few days before the market mayhem of Jan 21 would indicate so. One such fund, iPath MSCI India Index ETN, saw a steep fall in value just a week before the market sank. Between Jan 15 and Jan 18, the NAV of iPath MSCI India Index ETN fell 27.5 per cent. And the National Stock Exchange's benchmark Nifty fell around 17.5 per cent from Jan 18 and Jan 22.

(Source – Yahoo charts)

iPath MSCI India Index ETN is an exchange-traded note issued in the US. The notes provide investors with a cash payment at the scheduled maturity or early redemption based on the performance of the underlying index, MSCI India Total Return Index.

On Feb 5, iPath MSCI India Index ETN fell by 7.4 per cent while Nifty dropped by 11.4 per cent from Feb 6 to Feb11. Again from Feb 28 to Mar 3, the value of iPath MSCI India fell by 12.6 per cent and Nifty fell by almost 8.6 per cent from Feb 3 to Feb 7.

As recently as Jun 20, iPath MSCI India Index ETN dropped 6.21 per cent and the Nifty slipped about 7 per cent from Jun 20-24.

So, can one take cues from movement of Indian funds in the future to avert a repeat of the Jan debacle?

"Foreign investors went short on the Indian growth story just before the January fall. They were active in Indian funds on US bourses since November following curbs on P-note issuance by SEBI. Emerging economies like India and China were hit badly by the sub-prime issue by way of forex derivatives losses. Then came the spurt in oil prices. As Indian funds in US and the domestic indices are seen moving in tandem, any abrupt movement in these fund values may give a prior indication to local investors of a future havoc," concluded Gangadhar Acharya, fund manager at Flexion Capital.