India Still Best Bet For FIIs

While The US Rating Downgrade Is Likely To Trigger Panic Selling In Local Markets, It May Actually Make India An Attractive Investment Destination In The Long Term — Provided Crude Falls And RBI Halts Monetary Tightening

 The decision by S&P, the global ratings major, to cut US's sovereign rating by a notch to 'AA plus' from 'AAA' is something that has no precedence. So for foreign fund managers as well as institutional dealers in India, this is something they don't understand and hardly anyone has a definite clue how to react to it. As a result, brokers are certain there could be some knee-jerk reaction and selling after Monday's opening bell. 

    However, most FIIs are expected to be on a 'wait-and-watch' mode for a few weeks from now, see how things pan out in other parts of the world and then take a decision on their India portfolio, institutional dealers and fund advisors said. Infact, in one of the scenarios that could emerge over a period, fund managers say that FIIs could actually look at India as a preferred investment destination. 
    "In the short term, there would be pressure on the market because the problems will not go away in a hurry," said Shankar Char, head of sales trading, ICICI Securities. "Since no one has ever seen something like this, there will be volatility," he said. 
    The silver lining is that such volatility is expected to be short lived, probably extend for just a week or two, market players said. However, they warned that in case if any of the two other ratings majors—Moody's and Fitch—also cut US sovereign ratings, volatility and uncertainty could increase. 
THREE SCENARIOS 
As things stand now for FIIs, three phases are likely to unfold over the next few months that could be assigned to this unthinkable incident of US ratings downgrade. Some of the hedge funds, registered with Sebi as FIIs, will sell when trading begins on Monday. This is because most hedge funds are momentum traders and in times of uncertainty they prefer to be in cash. 
    On the other hand, long-term FII funds, like pension funds and insurance companies, will not sell in a hurry but will wait to have a better understanding of the implications and then take a decision on their India exposure. For the long term players, there are not many alternative markets that offer them good growth and chance of a better return than India, institutional dealers said. "Since there are quite a fewpositives in the Indian market, after this downgrade, money will not go back to the US," said Dharmesh Mehta, MD, institutional equities, Enam Securities. "We won't fall as much as other markets," Mehta said. 
    During the third phase, that is likely to unfold after a few months from now, India could actually start attracting more foreign funds than before. This is because if crude prices fall, that could bring down government's subsidy burden on petro products, pull down the rate of inflation, and also might help RBI's in not raising the rate of interest in the economy. The combined effect, market players believe, could again lure foreign fund managers to invest in the Indian economy. This is something that was witnessed after the dust settled on the Lehman collapse and the recession that followed in September 2008. 
    So far this year, FIIs have pumped in just over $2 billion into the Indian market, compared to about $29.4 billion in 2010, Sebi data reveals. Institutional dealers feel there is no way last year's record inflow could be surpassed this year, but 2012 could be a much better year for FII inflows. 
G7 finance ministers to discuss crisis 
    Finance ministers and central bankers of the Group of Seven major industrialized nations will confer by telephone on turmoil in the financial markets on Sunday, a senior European diplomatic source said. The source said Friday's unprecedented downgrading of the United States' credit rating by Standard & Poor's had added a global dimension on top of the euro zone's debt crisis, raising the need for international coordination. French finance minister Francois Baron, who would chair such a meeting under the French presidency of the G7 and G20, said in a radio interview it was too early to say whether there would be an early G7 meeting. G7 finance ministers and central bankers are due to meet in early September in the French city of Marseille. REUTERS

Cost of borrowing for the US may go up by a few percentage points. But that would not really affect us... (It's) life as usual (for India). Dollar still remains the dominant and a potent currency in the world Pratip Chaudhuri | SBI CHAIRMAN

I see the US downgrade, and indeed, the continued global slowdown, as signs of a structural shift of the epicentre of economic activities towards the east. Both short and long-term investment flows into India could accelerate, provided we don't continue to shoot ourselves in the foot, politically speaking 
Anand Mahindra | VICE-CHAIRMAN AND MD, MAHINDRA & MAHINDRA

The impact of the US downgrade, from AAA rating to AA+, on business is not yet known. It is too early to gauge the impact. If there is a double-dip, it is really bad news for the industry. But companies and customers are better prepared these days so... the impact will not be as bad as the last recession 
Kris Gopalakrishan | CEO, INFOSYS TECHNOLOGIES

The announcement is a formalization of what the numbers, which were already in public domain, were saying. In the short term, there could be some pain because of the impact on sentiment. But even if there were no downgrade, we feel the RBI should pause on rate hikes for India to maintain growth 
Shikha Sharma | MD, AXIS BANK

As stated by S&P, the downgrade is more a reflection of the political situation in the United States rather than the economic fundamentals. Given that Fitch and Moody's have retained sovereign ratings, it may be too early to remark on the immediate impact on business and investor confidence 
T K Kurien | CEO, WIPRO

In the short term, it could result in a fear psychosis that may lead FIIs to withdraw from the US market, triggering panic selling in India. We will have to see how the commodity and other markets react. A lot also depends on how the recovery takes place in the US Harsh Mariwala | CMD, MARICO