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FIIs vote with their money

Jul 27, 2009

As per a leading business daily, in the April-June quarter this year, foreign institutional investors (FIIs) have increased their stakes in 42 of the Nifty 50 stocks. In fact, FIIs were net buyers in India for 15 straight weeks since early March. It should come as no surprise that the promise of a stable, progressive government is one of the most important drivers of FII money into India. After all, many foreign historians, economic commentators and investors believe that India has not lived up to its potential since its independence because of wrong policy choices.

Take for example, commodities guru Jim Rogers. He has on record, a decade ago, said "India really is not a rational country…India as we know it will not survive another 30 or 40 years." Even today he takes a cautious view of the new Manmohan Singh government. "I've heard the same thing for the last 30 years", he says. "You've got the wind in your face doing business in India; you've got the wind in your back in China."

In the new book 'False Economy', Alan Beattie, the World Trade Editor of the Financial Times, provides an insight into what the west thinks about India. India's democracy is viewed as a great advantage over China's because it enables the system to change gradually. However, caste based politics has meant that the governing class is preoccupied more with vote banks than development. With the politicians not paying attention, the bureaucracy tries to protect its own interests.

Incidentally, this view does not clash with a purely bottom up style of stock picking. But despite all his focus on the economics of individual companies, even Warren Buffett admits that it is the American system that created so much wealth. He says that had he been born in another time or another country, all his stock picking ability would not have amounted to much.

In this context, there is little doubt that nothing pleases the FIIs more than signs of better governance in India. And actual delivery on the ground pleases them even more. Although we are not great fans of short term FII money, we have to agree that good governance could translate into great deal of wealth. If the basic issues of governance are taken care of and the enterprise of average Indian is encouraged, the standard of living in India is bound to go up. In fact, social investments like the National Rural Employment Guarantee and the Unique Identification project, if properly delivered, improve the fundamentals of the India story. In fact, even Jim Rogers admits that India will be 'the next great investment' if the new government sticks to his commitments. We hope it does.

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