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FIIs showing confidence

Jun 20, 2003

The bullishness on the stock market continues this week with the Sensex gaining another 3% yesterday. This is despite short-term concerns regarding slowing GDP growth, uncertainties regarding monsoons and the upcoming general elections. One of the major reasons for this rise in the markets has been a continuous inflow of FII funds. FIIs off late, have been optimistic about the Indian growth story, and have pumped in around Rs 56 bn in 2003 till now.Apart from the optimism generated by the rising competitiveness of Indian companies, the growth potential of the Indian economy has been another reason for FII optimism. While most of the emerging nations around the world have seen their growth rates slowing down over the past few years, the Indian economy has been able to maintain higher GDP growth rates. Only China and South Korea seem to have outpaced India.

GDP growth - A comparative view
CountryFY00FY01FY02FY03
USA3.8%0.3%2.2%2.6%
Brazil4.4%1.5%1.5%3.0%
India5.4%4.1%5.0%4.4%
South Korea9.3%3.0%6.3%5.9%
China8.0%7.3%7.5%7.2%
World4.7%2.2%2.8%3.7%
Source: CMIE, sorted on FY03 basis GDP growth

This very resilience displayed by the Indian economy has attracted FII inflows into the domestic equity markets. The FIIs bullishness has one major reason - strong fundamentals that exist for economic growth. More importantly, these fundamentals are receiving a leg up through infrastructure reforms. FIIs have been marginal players in the past with respect to the Indian equity markets. However, the graph below indicates the rising correlation between FII inflows and the Sensex.

FII inflows in 2003 have outstripped their investments in 2002. In 2003 till date, the FIIs have invested nearly Rs 51 bn in Indian equities. This is more than double their investments during the corresponding period last year. Infact, FII investments in 2003 (till date) outstrip their total annual equity investments for the year 2002 (Total net investment in 2002 stood at Rs 36.7 bn).

Going long on India
(Rs bn)2002% of total2003% of totalTimes (x)**
January 4.2 17.2% 8.9 17.6% 2.1
February 19.7 79.7% 3.8 7.5% 0.2
March 3.9 15.9% 4.1 8.2% 1.1
April 0.1 0.5% 4.3 8.5% 37.1
May 0.6 2.3% 12.2 24.2% 21.8
June* (3.8)-15.4% 17.2 34.0% (4.5)
Total 24.7 100.0% 50.5 100.0% 2.0
2003 till June as % of total 2002 = 137.5%
*till date in 2003, **2003 upon 2002

While the growth prospects of the Indian economy continue to remain strong as ever, the onus of maintaining the sustainability of growth lies on all sectors, i.e. agriculture, services, and industry, not necessarily in that order. While agricultural growth has been dependent on the monsoons, we have shown considerable maturity on the services front (for example: IT and financial services). And now, as the industrial sector improves its efficiency levels, in face of global economic slowdown, there is no looking back for the country and Indian investors. The Indian growth story might, thus, lead us to the very probable 'Asian century.'

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