It is common knowledge that the foreign institutional investors (FIIs) have a disproportionately heavy influence in the direction of Indian stock markets. It would not be wrong in saying that the sharp uptrend since the outcome of elections in May can be attributed to FII optimism. In this context the results of a survey by Bank of India Merrill Lynch (BofA - ML) holds importance. As per Mint, the results of the survey clearly indicate that emerging markets including India could continue to see FII activity in the coming months. The allocation to emerging markets is currently below historical averages. Hence if the allocation increases, India could certainly see more FII inflows. As the chart shows, FIIs have, only recently, been net overweight on emerging markets since May 2013.
Data Source: Mint
Now, besides the continued availability of cheap liquidity, the possibility of higher growth rates in emerging markets, particularly India, has been the main lure. If the growth does not mineralize, history suggests that the FIIs will be the first group of investors to look for greener pastures. Hence long term investors should not read too much into FII trends.