India may have outperformed its peers in the first half of 2012, but foreign institutional investors (FIIs), who set the trend here, have pared their holdings in several of the Sensex stocks over the past quarter. Of the 16 Sensex firms that have disclosed their shareholding pattern for the quarter ended June 2012, FIIs increased their exposure in just five companies, indicating a somewhat bearish view on the Indian markets. FIIs sold shares worth $340 million in the three months to June 2012, after having bought equities worth $8.86 billion in the March 2012 quarter.

The Indian market outperformed in the first half of 2012, posting gains of 8% for the MSCI India index compared with 2% for the MSCI EM index, which rose 2%. That’s despite the fact that the rupee underperformed its peer group. The markets had rallied sharply in the early part of the year following a ?risk on? trend globally after the LTRO or long-term refinancing operation was announced in Europe. However, FIIs lost their appetite for Indian stocks after the government said it would introduce the General Anti-avoidance Rules or GAAR. Following this announcement, local insurance firms and mutual funds sold $ 2.8 billion and $ 1.2 billion worth of stocks, respectively.

Moreover, JPMorgan believes the weak progress of the monsoon could be a risk for the markets. ?While the impact on growth may not be substantial, food inflation and sentiment will be likely casualties,? the brokerage observed.

While the softening prices of commodities is a plus for corporates, the sluggish global economy has left the country?s exports weak. Exports in June fell for the second consecutive month.

FIIs have bet on companies that deliver steady earnings growth, pushing up their holdings in India?s top mortgage lender HDFC as also its subsidiary and private lender HDFC Bank. They also upped their takes in some energy stocks like Tata Power, Coal India and GAIL.

In value terms, FIIs sold the most in IT bellwether Infosys with total net sales of Rs 1,624 crore in the company, followed by engineering and construction major Larsen and Toubro, private lender ICICI Bank and Bajaj Auto. In percentage terms, FIIs offloaded the most in Bajaj Auto followed by Dr Reddy’s Laboratories and L&T, and Jindal Steel (1.21%).

Of the 218 BSE 500 companies for which data are available, FIIs raised their stake in 100 companies and reduced their stake in 105 firms. The group upped their stake in pharma, healthcare and FMCG firms and reduced their exposure in infrastructure and engineering firms. Banks saw heavy selling as well as buying.

FIIs invested significantly in firms such as Cairn India (Rs 674 crore), Godrej Consumer (Rs 376 crore), Titan Industries (Rs 235 crore), United Spirits (Rs 211 crore), Federal Bank (Rs 117 crore), IDFC (Rs 113 crore)and TTK Prestige (Rs 102 crore). Lupin, Britannia Industries, Divi?s Laboratories, Bata India, Asian Paints and Cadila Healthcare were among the defensives that got significant FII investment.

?It is not surprising that FIIs have invested in defensive stocks given the uncertainty prevalent in the market,? said UR Bhat, managing director of the Indian arm of Dalton Strategic Partnership, a global fund registered as an FII in India.

FIIs sold the most in stocks such as LIC Housing Finance (Rs 616 crore), Yes Bank (Rs 584 crore), GlaxoSmithKline Healthcare (Rs 256 crore), Zee Entertainment (Rs 232 crore), Suzlon Energy (Rs 160 crore) and ABG Shipyard (Rs 151 crore).

The pace of inflows from here on would depend on global as well as domestic macro-economic situation. ?A lot depends on the government?s policy action and the developments in Europe. The global situation will determine the investors? risk appetite while the policy actions will determine how attractive India is seen as an investment destination,? said Bhat.