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FII musings...

Apr 8, 2005

Well, the cautious undertone in the market continues. When the BSE-Sensex fell harshly during March, many participants attributed this to the 'March' effect, meaning tax adjustments, VAT and of course the impending result season. Well, April is on and the nervousness still continues. The key concerns of the market continue to be related to the Foreign Institutional Investors (FIIs) movement. The fear is that the Fed chairman, Mr. Greenspan, will hike US interest rates faster as the year progresses and this in turn will make emerging markets like India look more riskier as compared to the US. The strengthening signs from the dollar are also considered ominous, indicating a US recovery.

On the other hand, policy makers in India are well aware of the danger that FII dependence poses. In fact, the Reserve Bank of India (RBI) Governor has gone on record to say that the FII versus FDI ratio in India is the exact opposite of the situation prevalent in China, and would like to see more FDI flows. The FM too, by his tax related actions, has shown inclination to try and increase domestic participation in Indian equities, in a bid to try and inculcate an equity culture that will save the Indian markets from too much FII dependence in the long run.

But the fact remains that foreign investors will continue to be the key drivers of equity market sentiment in the foreseeable future. And try as we might, it is na´ve to think that we can avoid a sell off in future.

The thing is, as India continues to reform, it will become more and more part of the globalised world. This will open doors, as well as bring in aggressive competition. But the more aligned we become to the globe, the more accessible we become to the foreigners, the more it will lead to confidence building that the India story is not just a flash in the pan and will therefore attract both FDI as well as FII flows.

As we continue to resolve our disputes with our neighbours, India will continually emerge as a safe place to invest capital and money. Our cost competitiveness and skills are a given. It's the system that has to deliver. Till such time, FIIs will continue to be more fickle than they usually are and so will be the stock markets.

But in this whole scenario, Indian Inc. performers will continue to reward investors, whether FIIs stay or exit. A good investment always finds buyers, albeit with a lag. Keep looking at quality companies to invest in, stagger your investments and show discipline when they reach your target price.

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