Emerging markets see fund outflows to the tune of 21 bn in 2011

This is their longest outflow streak since the third quarter of 2008. Investors have been taking risk off the table as political turmoil in the worlds key oil producing region prompted them to revisit their previous assumptions on inflation,interest rates and economic growth,EPFR says adding that many central banks are believed to be behind the curve in keeping the lid on inflation. Foreign institutional investors FIIs have pulled out close to 2 billion from the Indian market since the start of the year after pumping in a record 29 billion in 2010. FIIs are now concerned about sustained high inflation due to soaring crude prices,slowing growth and policy paralysis in the government.

While the government estimates GDP will clock 9 per cent in 2011-12,economists believe the number will be closer to 8 per cent given the tardy growth in fixed capital formation. That implies slower earnings growth for the corporate sector. Earnings for the Sensex set of companies are now expected to increase by just 16-17 per cent in 2011,stymied by rising interest rates. The Reserve Bank of India RBI meets later this month to decide whether further tightening is necessary. Wholesale inflation has been ruling at 8 per cent for more than a year and the central bank,which has increased key policy rates by 175 basis points since March 2010,has projected that inflation will taper off 7 per cent by the end of the financial year.

Analysts expect at least another 50 basis points hike in 2011 which would take the repo rate to 7 per cent. However,they point out that with the governments borrowing programme having been contained at R3.4 lakh crore for 2011-12,the yield on the benchmark bond may not cross 8.25 per cent.

EPFR has noted that concerns about policy responses in the BRIC economies and the effects on growth and their appetite for structural reforms,are reflected in the 14-week outflow streak in dedicated BRIC equity funds carried into March.

Although the markets have rallied smartly post Budget,the benchmark Sensex has underperformed almost all its peers,giving up close to 10 per cent since the start of the year. In a recent report,Credit Suisse said Indias problems of slowing growth and soaring inflation could be exacerbated by fund flows. We estimate only about 20 per cent of the ETF and 2 per cent of non-ETF FII flows seen in 2010 have reversed so far. The market may languish till mid-CY11,falling to 16,000 levels. At 18,500,the Sensex now trades at a price-earnings multiple of 14.6 times estimated 2011-12 earnings,below its historical average multiple of 15 times.

Meanwhile,China raised key interest rates in early February,the third time since mid-October last year. The benchmark one-year lending rate was raised to 6.06 per cent from 5.81 per cent while the one-year deposit rate was hiked to 3 per cent from 2.75 per cent. Inflation in China accelerated to 4.9 per cent in January from 4.6 per cent in December as prices excluding food rose the most in at least six years. FE

Withdrawal symptoms
9 FIIs are concerned about high inflation due to rising crude amp; policy paralysis
Economists believe GDP growth will be closer to 8 in 2011-12,against the projected 9
RBI might go in for at least another 50 bps hike in repo rate when it meets later this month.