The result is out and it is better than the expected. The Bull Run at the Indian bourses maintained its rhythm for the whole year and 2010 ended with the magic figures for the Indian capital market. The investment by FIIs crossed its previous record level of $ 27 billion to touch the level of $ 39 billion in 2010.
With the economy racing ahead to forget all bad memories of slump, the stock markets have witnessed an unparallel level of FII investment. Both equity and debt had a dream run in 2010. The huge inflows came despite only about 50 new FIIs entering the country during 2010, on top of the about 1, 700 FIIs already present at the end of 2009. The FII inflow which was around $ 9 billion in 2006 has grown to $ 39 billion in 2010.
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 Inc's performance and trust entrusted by global investor base. The hot money poured in equity by foreign institutional investors is $ 29 billion. It is almost 70% more than its previous level of $ 17 billion in 2009. The level of increment can be easily gauged by the fact that the equity investment by FII this year is around 30% of total investment by FII since 1992.
The investment in debt is equally encouraging. This year the investment in debt by FII crossed $ 10 billion. The previous record for this segment is around $ 2. 6 billion in 2008. Not only this, investment this year is more than 50% of total investment in debt by FII since 1992. A look at the table clearly reveals that FII investment in debt has become 11 fold in last 5 years. FII's participation in the domestic debt market has witnessed a 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 $30 bn from US $20 bn. The current FII limit in government securities has been increased by US$5bn to US$10bn. This incremental limit of US $5 bn will be available for investment in securities with residual maturity of over five years.
What is intriguing for the government is that despite its best efforts the FDI in India has been showing downward growth for 2010 and in the same period FII is growing by leaps and bounds. Fortunately the strong FII inflow has provided India the much needed cushion in a year when the global economy continued to reel under pressure. Another good point for India is that FII confidence in India continued despite country facing one of the worst spades of corruption including 2G scam and financial bribery scandal.
Apart from the country's robust economic growth, weakness in overseas markets due to European crisis, Federal Reserve's second quantitative easing plan and Indian government's disinvestment also added to the huge inflows in 2010 by FIIs. The government's plans to disinvest in public sector companies, including Coal India, MOIL and Shipping Corporation of India, have also given more investment opportunities to FIIs.
However in a macro economic scenario every return has its matching risk and FII investment is not unique in this sense. The volatility is the FII inflow is always on the card and its impact on exchange rate and asset prices are required to be monitored to ensure smooth sailing on inflation front. But despite the note of caution, the government did not intervene in the foreign exchange market. This was contrary to the stand taken by many emerging markets. Probably government seems less concerned over problem of plenty rather than the insufficient FII inflow.
Another crucial impact of heavy participation by FII is changing profile of investors in India. It has become game changer for Indian stock markets . FIIs hold an average of 12% share in BSE-500 companies, which account for 93% of the market capitalization on the Bombay Stock Exchange. Clearly there is no decoupling theory for Indian bourses and equally there will be no escape from global demons.
With 2010 turning out to be a dream run in terms of FII inflow to India, the 2011 has not shown the similar momentum. With the markets witnessing fall in the early 2011 and FII moving to developed markets, the road ahead looks quite bumpy. The problem looks to have been further aggrandized by the spate of corruption in India. So the sheen of Indian market for FII no longer looks a perennial story. Clearly all that glitters is not gold and so despite December being able to break the jinx, India has to display its commitments towards reform and better governance to hit the bull's eye.
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