On a macro level, what will significantly impact the Indian stock markets in the near future? This interesting question posed to you in our Investor Survey conducted in December 2008 offered us thought-provoking responses from your end. In this article we give an insight on some of the most voted factors.

Buying/ Selling by FIIs: Clutching the highest number of votes (45.3%), FII activity was seen as the key driver that could impact the Indian markets over the longer term. As seen from the following graph, higher FII inflows have been an important parameter determining the movement of the stock markets. In 2007, when FII invested US$ 17.2 bn, stock markets notched 46% gains. The Indian economy grew over 8% for the third consecutive year and the prospects looked good for 2008. However in the following year, global financial crisis clouted the world markets, with India being no exception. This led to the FIIs turn into net sellers. The total FII disinvestment in 2008 was to the tune of US$ 13 bn. In the same period, the benchmark BSE Sensex lost 52% of its market capitalisation. This clearly indicates that the FIIs play a critical role. Having said that, it would interest investors to know that while the FIIs have shied away, investments through the FDI (foreign direct investment) route have stupendously shot up in the past few months, given the attractive valuations. This is expected to hold good for India’s long term growth story.

India is better positioned than its developing and developed peers in terms of long term fundamentals. It does not have a credit or a real estate bubble. It also has a large domestic consumption market, unlike China which depends on exports. Indians have a savings rate as high as the Chinese. These factors are expected to lure the FIIs once again to the Indian shores. Infact, in December 2008, they were net buyers of Rs 14 bn worth of stocks (after having sold stocks worth Rs 279 bn between August to November 2008). The FIIs are currently holding Indian stocks worth US$ 53 bn.

Policy/Regulatory initiatives in India: Following the FII factor, policy and regulatory initiatives got 37.8% votes. While the government is pursuing economic reforms, the pace of implementation leaves a lot to be desired. In order to improve the economic growth, need is for structural and economic policies on a faster scale. Policies are vital for faster infrastructure development, employment growth and strong GDP growth. Further, policies regarding improving public finances, fiscal policy, FDI limits, and privatisation are also a requisite.

Elections in India: 15% of the respondents have voted the elections in the country to significantly impact the Indian stock markets in the near future. With the world’s largest democracy expected to go to the polls in April-May of this year, elections would definitely play an important role in determining the investor sentiments. The saga of India growth story and feel good factor has declined in the last one year. The elections would be very important as they will be held in an environment of global credit crisis, lower domestic growth, higher fiscal deficit, rising terrorism and religious conflicts. In order to continue with our growth story, a stable development oriented government is need of the day.

Terrorism in India: 1.6% of the respondents have voted for this factor to influence the stock markets. The recent terrorist attacks in India were an added blow to an economy already suffering from internal problems. A Harvard University study (Terrorism and the World Economy, October 2005) states that higher levels of terrorism risk are associated with lower levels of net FDI. The loss of foreign investor confidence following acts of terrorism would prompt large outflows of capital. If the terror attacks and domestic violence continues in India, the impact on stock markets would be greater.