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Foreign Capital: Change in perception?

Dec 5, 2003

Stock markets all over the world have been back in the reckoning in the current financial year (FY04). However, the start of the current calendar year (2003) for a stock market investor was something that he wouldn't want to remember for long. The uncertainties with respect to the war on Iraq followed by the SARS epidemic had a telling effect on investor sentiments, which was evident from the losses on indices all over the world. Just to put things in perspective, in the period January-March 2003, while the Nasdaq lost 3%, the Hang Seng (Hong Kong), the BSE Sensex and the FTSE lost 8%, 9% and 10% respectively.

While the fall continued in April 2003 for the Sensex and the Hang Seng, the other two major world markets, Nasdaq and FTSE, were already on the upturn. But, as can be seen in the chart above, the Indian stock markets were quick to make up for the April losses. Since April this year, the Sensex has been the biggest gainer amongst the four indices with gains of 64%!

Now, there are various reasons for the Indian indices gaining sharper ground. The first and foremost being the perception towards the emerging economies in recent times, particularly after the debacle in the US, which had pushed the country almost into recession. This has led to a large amount of foreign capital finding its way into India. The Indian economy is the second fastest growing economy in the world currently. For FY04, the GDP growth rate for India is forecasted to cross 7%!

The slowdown in world economies, especially Europe, could be attributed to lower demand off-take owing to consumer confidence taking a hit. The world slowdown led to the Central Banks around the world cutting interest rates. In the US, however, despite the strong growth in GDP in the last two quarters (mainly led by consumer demand), investments by corporate America has not picked up forcing the Fed to maintain low interest rates (1%) in the US. The interest rates in Europe have also fallen to 2%. These were the lowest interest rates seen in decades for these economies.

On the other hand, despite the Indian Central Bank, the Reserve Bank of India (RBI), also resorting to interest rate cuts, the interest rates scenario prevailing in the country has been relatively more lucrative for international investors. Apart from this, the appreciation in the Rupee has further made investments into India more attractive. Another reason for the strong inflows of foreign capital in to the country may be attributed to the fact that due to the depreciation of the US$, US$ assets are no longer rewarding, hence the flight to relatively more attractive destinations like India. Coupled with this were the structural changes undergoing in the Indian economy like divestment, reforms, etc, that have changed the perception of the Indian economy among the international community.


Source: SEBI

All these factors attracted monies into India from the world's most developed economies like the US, which brought into being a huge amount of liquidity looking for profitable investment options and destinations. Apart from aiding the rise in India's foreign exchange reserves (US$ 95 bn at latest count), this money (see FII chart above) also helped the Indian stock market gain higher ground. As a result, the Indian benchmark index has outperformed other global indices (as mentioned above) in FY04 so far. Going forward, it must be noted that the Indian growth story may not be over as yet as the effect of lower interest rates and the restructuring exercise undertaken by India Inc. over the last coupe of years is yet to unfold in totality. Add to this the huge population base (potential consumers) of the country much of which (the rural population) is still untapped in the broader way, hence the potential for India Inc. seems immense.


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