Sunday, September 20, 2009

FIIs in Indian Capital Market - How Predictable Are They?

I just presented a paper on "Impact of FIIs and DIIs in Dynamism of Indian Capital Market" - co-authored with one of my senior colleague Dr. Rekha - at the 5th National Conference on "Indian Capital Markets - Retrospect and Prospects" held at GJIMT, Mohali.

Dr. Prem Kumar, Director, Ludhiana Stock Exchange and an eminent industry practitioner had asked me "what is my thinking about FIIs' investment flow in Indian capital market in future". While answering his query one thing that kept coming to my mind is that the FIIs, though being a major source of liquidity in the Indian capital market, are basically speculators. Otherwise why would they repatriate their money from an economy which is fundamentally sound - a $1 trillion economy with a steady-state growth of 6.5% (when others were striving hard to show a positive figure).

It is understood that there was a severe liquidity crunch at their home, the Indian stocks were highly over-valued, and we also cannot eliminate the possibility of a subtle pressure from their governments to bring back the money home. But, the investment behaviour of the FIIs in the Indian capital market - especially the equity segment - is crazy. The bull-run in the market post elections results in May 2009 seemed to me a handi-work of the foreigners. Out of the 14 trading days, during which the Sensex shot from12000 pt to 15000 pt, they were net buyers on 10 occasions. But, they immediately offloaded some investments in the months of June and July. What is the justification for this behaviour? Isn't it queer?

Also, the Sensex is too narrow an index to reflect the actual impact. Dr. Prem Kumar suggested broadbasing of the Sensex which is highly solicited. Also, the regulatory framework should ensure that the FIIs stay invested for long-term. The FIIs comprise only about 20% of the total combined turnover of NSE and BSE, yet they are powerful enough to influence the retail investors and dance them to their tunes.

3 comments:

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vishal said...

Hello sir...
Financial "Institutional" Investors as they are called so....
I don't know what kind of institutional frame work they have but trust me whenever this word (that seems to make a lot of noise on dalal st.)reaches my ears I seem to be quite fishy about this segment of investors. The reason being they come in with masks of some big names.... but no body knows who's behind these masks.
no body knows who's money comes in n goes out by means of these...I mean what kind of money( black/white) is being used to play with the " sentiments" of Indian investors.....
I wish I had the authority( under the RTI act) to raise my ques to these ppl....:)

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