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.

Do India Still Expect To Emerge Unscathed?

India's corporate optimism has sunk on worries about the global economy and weakening demand, according to a new survey on Monday, as the stock market and rupee fell to fresh lows. Some 57 percent of the 348 firms in the cross-sector survey reported Asia's third-largest economy had grown "moderately to substantially worse" in the first quarter of the financial year. In the same April-June period last year, just 12 percent believed the business climate had deteriorated, said the survey by the Federation of Indian Chambers of Commerce and Industry (FICCI). The findings came days ahead of the start of India's quarterly reporting season and as the stock market fell to a two-year-low amid concerns about the world credit crisis while the rupee hit a five-year low against the dollar.

The BSE benchmark 30-share Sensex index tumbled 469.65 points or 3.75 percent on Monday to hit an intraday low of 12,056.67 -- a level last seen in October 2006 -- as risk-adverse investors continued to pull out funds. The outward flow of investment pushed the rupee down to 47.35 to the dollar, its weakest level since April 2003. As of Friday, Indian shares had lost more than 38 percent so far this year on overseas fund outflows of 9.17 billion dollars. During the same period last year, overseas funds bought 13.62 billion dollars' worth of Indian stocks.

More than 50 percent of those companies surveyed forecast India's economy would remain the same or worsen over the next two quarters. The global financial crisis along with the high cost of credit, reduced availability of funds and weak demand have created added hardship for the Indian corporates in a globalised market.

Earlier, Indian policymakers insisted it would largely escape fallout from the US-led financial turmoil thanks to its still mainly insulated economy. But lately, policymakers have changed their tune, with the government's Economic Advisory Council warning no country can "expect to emerge unscathed." Interest rates at seven-year peaks aimed at wrestling down double-digit domestic inflation have hit borrowing costs, weakening demand and corporate expansion.