|»5 Minute Wrap Up by Equitymaster|
On This Day - 10 AUGUST 2010
FIIs are outdated, here come FRIs
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FII inflows in the past have stirred up considerable volatility in the Indian stockmarkets. One need look no further than the past couple of years. When the global crisis was at its peak, FIIs withdrew money in droves. And therefore contributed to the plunge in Indian stockmarkets. What is more, FIIs have also influenced the recent rally in the markets. This is by pouring in US$ 11 bn into Indian equities in the year so far. Little wonder then that their investments have been branded as 'hot money'. As the motive for investing for the longer term has not really been there.
The perception seems to be that more inflows into India would boost the country's economy. That would certainly be the case with respect to foreign direct investment (FDI), which is longer term in nature. As far as foreign retail participation is concerned, the key determinant would be their investment horizon. For you as the investor, this development alone would not be sufficient reason enough to invest in equities. What is important at all times is to pick up those companies with good managements, strong financials and reasonable valuations.
However, no such act raised its ugly head during the recent financial crisis. And this enabled the global trade to quickly bounce back. Interesting to add that countries like China and India have actually reported an increasing share of rich world imports in their overall imports after the crisis.
But all is still not well. Unemployment in developed nations still remains pretty high. And in view of this, rich countries could well be forced to raise tariffs. They even have the headroom to do this in the absence of any significant development since the Doha round of trade talks. Thus, the specter of higher tariffs and consequent fall in global trade continues to loom large. This is till the time the developed world continues to have a jobless recovery. India though has relatively less to worry about this than its northern counterpart, China.
However, this time around, the government is keen on the banks catching up on growth targets. In the upcoming meet with the Finance Minister, the government owned banks may have to make a commitment to stay on course. A close review of the banking sector's performance by the Ministry is appreciable. However, we believe that forcing the government banks to take up 'social' mandates that are unprofitable for their businesses is unfair to the minority shareholders of the entities.
The years from 1991 onwards are considered to be reform years for the country. Evidently, the freeing up of the economy has benefited some sections of society much more than others. An Economic Times report points out that this disparity is more to do with the fact that a vast section of Indian society do not have the means to increase their earning power. Due to this, some people are finding themselves in a better position to grab the opportunities a growing economy is throwing up. Clearly, subsidies, support prices and employment guarantee schemes are not proving to be enough. It is education and skill development where more focus should be. As the saying goes, give a man a fish and you feed him for a day. Teach a man how to fish and you feed him for a lifetime.
A part of that fear has now been quashed. This is given that the government has now exempted PSUs from this rule of raising the public shareholding to 25%. This follows the two major share sales from PSUs ( NTPC and NMDC) that drew weak response from investors. We wonder if private firms will ask for a similar exemption as well!
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