Channel: Markets

Thursday, October 07, 2010
FII Inflow in Indian Market: How long will the party continue?
The unprecedented bull-run continues for Foreign Institutional Investor (FII) inflows to India. The net investment this year has already crossed the 2009 figure.
Tables & Graphs

The unprecedented bull-run continues for Foreign Institutional Investor (FII) inflows to India. The net investment this year has already crossed the 2009 figure. Even more stunning is the FII inflow in debt which has become 10 fold compared to last year and the composite result is the unparallel opulence in Indian stock markets. The Indian markets are at around 32 month high and it will be not be a surprise if they breach the previous peak.


India which was applying import substitution and self reliance as part of its developmental strategy in 1980s has moved substantially to a policy regime of liberalised financial market dynamics and result is pleasant in terms of huge surplus of FII inflow. India allowed the FIIs in 1992 as part of its structural adjustment program.


The FII inflow which was around $ 9 bn in 2006 has grown to $ 29 bn. The confidence instilled by FII in Indian corporate is quite evident from the last 5 years inflow. Except in 2008, the net inflow in equity has been quite strong and substantial. The current inflow is a testimony to India Incís performance and trust entrusted by global investor base.


A look at the table clearly reveals that FII investment in debt has become 11 fold in last 5 years and is touching the $ 10 Bn. FIIís participation in the domestic debt market is on the rise, thanks to the high interest rate differential that exists in comparison with the overseas interest rate regime, especially in the US. The appetite for FII ensured the increase in the overall limit for bonds held by foreign institutional investors (FIIs) to US$30bn from US$20bn.The current FII limit in government securities has been increased by US$5bn to US$10bn. This incremental limit of US$5bn will be available for investment in securities with residual maturity of over five years.


The large scale involvement of FII has become the game changer for Indian stock markets and the result is the significant change in profile of investors at domestic bourses. FIIs hold an average of 12% share in BSE-500 companies, which account for 93% of the market capitalization on the Bombay Stock Exchange. The increasingly dominant investors are FIIs, followed by domestic financial institutions and mutual funds.


One of the spinoffs of this unprecedented inflow of funds from abroad is the appreciation in Indian rupee against major currencies, mainly the US dollar and the threat looms large as a strong Rupee can very well derail the export growth. A further increase in such inflows can trigger off demand by the regulators to put a ceiling on the FII activity in India.


While India has set the ball rolling, it is important to know the axis of this growth dynamics. The recent surge in FII inflow in India is not out of place. India has the driving factors for FII inflow. While regulation and trading efficiency have been exemplary due to institutions like SEBI & RBI, attractive average return has also helped attract international capital.


The external factors can be attributed to continuous sluggish growth in Western Europe and North America and availability of cheaper capital. Most believe that the flows will continue as investors seek more growth opportunities in equities, given the low interest rates, especially in developed market fixed-income securities. Indiaís robust economic growth indicators such as 8.5% estimated growth in gross domestic product for fiscal 2011 and 20% estimated company earnings growth have also helped attract overseas money.


The outlook for inflows continues to look good as interest rates in the developed world are expected to remain low. Even though valuations of Indian stocks are no longer cheap, growth rates of over 8% for the economy are justifying the bull run of FII for Indian markets.


Now, all this sounds extremely promising and from the looks of it, a seemingly unending party appears to be on for FII on Indian bourses. But before signing off, here are the cliff hangers:


Will the FII inflow follow a cyclic pattern of push & pull?


Does the performance of Indian corporate good enough to edge past the peers?


How long can India ignore the problem of plenty?


Will the December outflow break the jinx?


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