FIIs: India centric? - Views on News from Equitymaster

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FIIs: India centric?

Jun 15, 2005

Foreign Institutional Investors (FIIs) inflows continue to grab headlines every now and then. They make it to business news in either of the three situations - if they pour in huge amounts of money, if they pull out some of their money or they sit on the sidelines having adopted a wait and watch approach. This, thus, effectively means that they manage to make news all the time! Over the last couple of years, FIIs have become an important part of our stockmarkets. And why not? After all, US$ 19 bn (amount invested to date since 2003) is no small amount. This has largely (if not entirely) been the reason for the Indian stock market rally.

Another indication of FIIs considering India as an investment destination, apart from the fact that FII money has actually flowed into Indian equities, is the ever-increasing number of FII registrations with the stock market regulator, Securities and Exchange Board of India (SEBI), since 2003. As can be seen in the chart above, these have increased from under 500 in early 2003 to 721 as on June 14, 2005 and these have been increasing every month despite the Indian stockmarkets trading close to their highs. Now, this could be attributed to two things, either these foreign institutional investors (FIIs) truly believe in the India story over the next few years or they are simply taking advantage of the prevailing positive sentiment.

While it is rather difficult to prove that the FII money coming into the country is largely the so-called 'hot money', which will ditch Indian investors at the slightest indication of an adverse development, these being largely momentum players, the entry of some globally respected FIIs (like CalPERS and Fidelity) into the country does give a lot of credence to the long-term India story. This is not merely owing to the fact that these funds, which manage billions of dollars, have started paying attention to Indian stock markets, but is more so because of the fact that Indian equities have managed to pass CalPERS' litmus test.

It must be noted that to make it to CalPERS' (California Public Employees Retirement System) list, a prospective investment destination is passed through various tests, which includes stock market efficiency, corporate governance practices and political stability. Another factor worth noting here is many emerging markets have yet not made it to this list, which includes China. This, thus, seemingly indicates that not only is the quality of management and earnings on the upswing, but the prospects from a long-term horizon also appear promising for Indian equities.

The strong growth of the Indian economy, led by the continuous corporate restructuring exercises being adopted by India Inc., the reforms in telecom, infrastructure, real estate, power, banking, etc. and the huge potential in sectors like pharma, auto ancillary, textiles and software, have all played their part in attracting foreign investments. Apart from this, until now, the weakening US dollar (owing to its deficit) has been prompting foreign investors to invest in non-dollar assets, which is partially responsible for FII money flowing into emerging markets. However, any signs of reversal on any of these fronts would be viewed negatively and investors must remain alert, as this would force FIIs (especially the momentum guys) to reallocate to better opportunities in other emerging economies.

To conclude, however, investors need not get overly worried about FII inflows (or outflows) into the country, provided they have a long-term investment horizon. Investors need to realise that a fundamentally strong company will attract investors (FII or otherwise) over the long-term, once the true value of the company is understood. Let the fundamentals dictate investment decisions, not FII fund flows.

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