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Sensex could touch 34,000 if...

Mar 11, 2010

A lot is being written about global investors and economists having a positive view about the emerging markets. Amongst the emerging markets, the BRIC nations - Brazil, Russia, India and China - are the few favourites. Among these, the latter two are preferred. Between the two, there are continuous debates underway. However, considering that India's growth story along with it seeming to be a safer bet of the two, an increasing proportion of the global investing community is slanting towards India as a good long term investing opportunity.

Foreign institutional investors (FIIs) are certainly amongst the most influential set of investors in the Indian stock markets. Of course, there have been a lot of other factors at play like investments by domestic institutions and retail investors. But an argument can certainly be made that whenever FIIs have been strong buyers, BSE-Sensex has more often than not given good returns.

As you can see from the following chart, FIIs have been steadily and gradually been increasing their exposure towards the Indian markets over the past decade or so. Well, this is obviously by taking an exception of selected years such as 2002 and 2008.

Data Source: CMIE

Hence, the kind of impact their buying has on Indian stock markets is certainly worth a look. Although it would be quite difficult to calculate their precise impact, we have attempted to work out the same.

We have taken the net FII inflow of a particular year and seen how the Sensex market cap has changed in that respective year.

Data Source: CMIE, Equitymaster
*All the numbers have been rounded off to the nearest 100; Net cash flows considered

As can be seen in the above displayed chart, barring 2004, every time FIIs have bought stocks worth Rs 100, the Sensex has witnessed a market cap increase of a minimum of Rs 800, a ratio of 8:1. In fact, the number has gone as high as Rs 1,600 for every Rs 100 invested.

However, the average ratio for this period stands at about 10 to 1. This means that every time FIIs invested Rs 100 into the markets, the Sensex market cap rose by an average of about Rs 1000.

It must be noted that during bad times, such as the one we saw in 2008, FIIs tend to be the largest sellers as well. However, for the purpose of calculating the average gains in the market cap, we have not included the FII outflow of that one year.

In US$ terms, FII investors invested nearly US$ 18.5 bn during 2009. Prior to 2008, the net average FII inflows stood at about US$ 10.7 bn, US$ 8.4 bn and US$ 15.4 bn in 2005, 2006 and 2007 respectively (current foreign exchange rate 1 US$ = Rs 45.6).

The BSE-Sensex market cap stood at about Rs 25 trillion as of yesterday, while the BSE-Sensex stood at about 17,100 points. Now for the BSE-Sensex to touch 34,000 points, its market cap would be required to be at levels of Rs 51 trillion. This means Rs 25 trillion needs to be added to its market cap.

Now using the logic mentioned in a few paragraphs above, FIIs would be required to invest (net figure) nearly Rs 2.5 trillion (a ratio of 10 to 1) or US$ 55 bn.

US$ 55 bn is definitely an enormous sum. However, considering that the FIIs invested about US$ 18 bn (net investments) during 2009, this does not seem so farfetched. So, even if the Indian markets attract net FII inflows of about US$ 18 bn (as they did in 2009) annually over the next three years or so, Sensex could easily double from the current levels.

You might argue that this would be an aberration considering that the Indian markets were at their lows, and frontline stocks were available at very attractive valuations. However, a lot has changed since last year. And the investors expect things to gradually improve from here. However, even the FII investments may not top US$ 55 bn and we would still be there. But this would require the domestic institutions to let loose their purse strings in a big way!

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11 Responses to "Sensex could touch 34,000 if..."


Mar 24, 2010

It is impossible. By inferring from unrelated data you can't
conclude like this.



Mar 21, 2010

sensex hitting 34,000 points seems to be a possible one since indian markets performing well other than the other equity markets in the world and is reaching new highs in every bull trend.


Dr. S. P.Thakur

Mar 20, 2010

THIS IS MERELY SPECULATION.IN 2010 IT IS NOT POSSIBLE TO REACH SENSEX TO 34000.the market is based on liquidity and not on fundamental.SEE ON MONDAY.



Mar 17, 2010

While FIIs are Proactive in their planning our domestic Institutions are only Reactive when situtions change...always stepping in to salvage when the powers that be want...fully professionalised investment by our Financial Institutions will be great for our Market and Investgors.


Ajit S Yadav

Mar 17, 2010

Rather than being FII centric,
We should look at the "growth" of our own retail participation direct or inderect.


sps gill

Mar 17, 2010

Well the analysisi seems to be biased towards the bulls. A holistic approach would be better.


Cijo Thomas

Mar 15, 2010

Did anyone thought sense will hit 20,000 when we were at 6000levels?


Vijay B

Mar 13, 2010

34000 points ....looks impossible. Dont forget that the world is in major financial turmoil and there is a likelihood of a Chinese slowdown ( or even a crash). The FIIs are short term oriented and they would prefer to exit the emerging markets if any indicator turns negative. 55 - 60 bln in Indian equities looks farfetched.



Mar 12, 2010

Nice statistics, would be better if we had comparision of Domestic investment too over the past ten years. And how it affects the market cap in %terms wrt FII investments. It would also make a good bet to know how much the market cap deteriorates when FIIs are net sellers.


Madhav Mavalankar

Mar 12, 2010

Industrial growth rate is around 11% Hence if the valuations remain at this level, and if FIIs keep pumping money at USD 18 Billion each year for the next three years then Sensex will go to 29,000.
This augurs well with your theory of 1:10 Leverage factor, but as senex goes up then this leverage will have a diminishing ratio. So 1:7 ratio at the end of three years looks more plaussible. Happy investing in India story.

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