Foreign funds: Changing stance? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Foreign funds: Changing stance?

Apr 6, 2004

One factor that has largely determined the movement of Indian indices in the past has been the rapidly growing Foreign Institutional Investors (FIIs) inflows. The fiscal FY04, especially, has been a witness to one of the largest net inflows (US$ 8.6 bn to be precise) of FII money into Indian equities. Out of this chunk, more than 40% came in the third quarter ending December 2003. However, since then, inflows seem to have slowed down marginally. And this has had an effect on the movement of the key Indian indices that have traded with increased volatility. Take a look at the graphs below.

While there are several factors that have aided these inflows into the Indian stock markets, the key among them have been:

  • Relative difference in US and Indian interest rates (US because it has been one of the largest supplier of funds into the Indian markets),

  • The 'emerging market' growth theory, and

  • Improving prospects of the Indian economy.

Now, the third factor continues to hold true, as the Indian economy is expected to grow by over 8% in FY04 and the prospects over the long-term hold promise. Corporates are carrying on with initiatives that would make them more efficient. And as a result of these initiatives, in the last three years, bottomline growth has outpaced revenues growth for index companies. Going forward, revenue growth prospects remain promising not only from the domestic market from also from international expansions.

India is also in the limelight for its potential as an outsourcing destination for services. Besides software, auto components, pharma research, engineering services are also benefiting from the cost arbitrage factor. Some examples in this regard are Dr. Reddy's (pharma research), Bharat Forge (auto components), ABB (engineering services), Siemens (engineering and software), Tata Motors (cars) and Infosys (software services).

These factors, combined with efforts taken by the government (like infrastructure development and housing), have reinforced optimism in the minds of foreign investors. They have, consequently, responded through investing in Indian companies.

However, apart from this, the relative difference in interest rates in the US and India has also resulted in increased inflow. Interest rates in the US have been kept at their 45-year lows (of 1%) by the Federal Reserve that is still waiting for some sustenance in economic recovery before changing stance on the interest rate policy. This has led to US investors (who contribute the largest chunk of foreign funds) eyeing equities in India and other emerging nations like South Korea, Thailand and the Philippines.

Besides, the global economy was flush with funds (read liquidity) considering the fact that all major economies were struggling for growth and therefore most central banks took a softer interest rate stance. The emerging markets have thus been duly rewarded for the risks (emerging markets are relatively more risky then their developed counterparts) they have taken. Take a look at the table below.

Global markets: YoY returns...
India3,081 5,591 81.5%
Thailand362 647 78.7%
S.Korea539 881 63.5%
NASDAQ1,348 1,994 47.9%
Philippines1,039 1,424 37.1%
Dow8,070 10,358 28.4%
China1,523 1,742 14.4%

Now when the Fed has somewhat changed its stance by substituting 'for a considerable period' with 'it can be patient' in its stance on the interest rate policy, there are certain indications for Indian investors. If the US economic recovery really shows signs of sustainability and that job growth picks up, the Fed might raise interest rates. And this is likely to affect the flow of FII money into the Indian equities. If that happens, we might witness further correction in the markets as FII inflows, which have held up the Indian indices in the past, might slow down. Investors, in this regard, need to exercise caution. The bottomline - Do not bank on FII inflows for any upward movement in the stock markets.

Going forward, any sustainable increase in FII flows into the Indian markets would rest on the expectations of sustained improvement in the Indian economy and, more importantly, its ability to outperform other emerging markets. This is to say that it would not only be India's growth, but the relative differential of its growth to other emerging markets, which would determine the flow of foreign funds into the Indian economy.

Now, the challenges are many. Key amongst them are building up effective institutions, sustaining investments in infrastructure and keeping a close check on red tapism. Though these factors sound very macro, these are fundamental issues that have shaped the way we are being looked at in the global arena.

Equitymaster requests your view! Post a comment on "Foreign funds: Changing stance?". Click here!


More Views on News

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

ONGC to NMDC: Here are 5 Stocks Value Investors Should Closely Track (Views On News)

Nov 26, 2021

Before investing in value stocks, research the company and gain insight into why the market is discounting it.

Top 5 Stocks FIIs Bought and Sold Recently (Views On News)

Nov 25, 2021

FIIs have largely stayed on sidelines for the past few months, withdrawing money across emerging markets.

Do You Know Certain Less Popular Mutual Funds Can Help You Build Solid Wealth? (Outside View)

Nov 29, 2021

PersonalFN explains why you should not ignore less popular mutual fund schemes when you create your investment portfolio.

The Best Investing Strategy in a Market Crash (Profit Hunter)

Nov 29, 2021

We go back to the 2020 crash to find which stocks offer the best protection.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 29, 2021 (Close)