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FIIs Vs Sensex: The journey so far

Dec 9, 2004

Much has been talked about the FIIs dominating the proceedings on the Indian indices. In this article, let us test the dominance of FIIs over the Indian markets over the last 12 years i.e. since 1993. The earliest data on FII investments is available since 1993. At the end of that year, the FIIs had invested about US$ 827 m (about 11% of what they have invested in 2004 till date, in dollar terms). The BSE Sensex gained about 25% that year. The table below elaborates on the FIIs Vs Sensex journey over the past decade.

FII trend since 1993
Calender year Net investment
(Rs m)
Net investment
(US$ m)
Sensex level
December end
Sensex %
gain YoY
% change in
FII investments (YoY)
1993 25,953 827 3,346 24.8%  
1994 67,913 2,165 3,927 17.4% 161.8%
1995 38,538 1,192 3,110 -20.8% -44.9%
1996 108,035 3,063 3,085 -0.8% 157.0%
1997 57,256 1,602 3,659 18.6% -47.7%
1998 -7,324 -171 3,055 -16.5% -
1999 66,967 1,557 5,006 63.9% -
2000 65,423 1,493 3,972 -20.7% -4.1%
2001 127,829 2,693 3,262 -17.9% 80.4%
2002 37,071 752 3,375 3.5% -72.1%
2003 322,975 6,447 5,792 71.6% 757.3%
2004 352,578 7,861 6,316 9.0% 21.9%

Of the 12 years chronicled in the table above, 8 years have shown a direct co-relation with the BSE Sensex. For example, in 1994, the FIIs poured in US$ 2.2 bn (about 162% more than in 1993), the Sensex gained 17% that year. Similarly, in 1995, when the FIIs did not maintain the momentum and invested far less than they had in 1994, the Sensex lost 21% that year. This is clearly indicative of the high dependence of Indian markets on FII money.

Interestingly, of these 12 years, the Sensex has YoY gained 7 times, and lost ground 5 times. Within the declines, the Sensex has lost 16% or more on 4 occasions (in 1995, 1998, 2000 and 2001). Of these, 3 years (1995, 1998 and 2000) have shown a direct co-relation with the trend of FII flows.

There is no doubt that 2003 and now 2004 have been landmark years in terms of record FII flows into India. To that extent, both 2003 and 2004 has seen the indices nearing or breaking their previous highs. Whenever the Indian markets have seen record FII inflows, the Sensex too has shown signs of touching new highs. And whenever FIIs have shown a lacklustre approach towards India as an investment destination, the Sensex has either fallen or shown no momentum at all.

2003 and most of 2004 has seen a golden run up in Indian equities. But it is necessary to understand the rationale for the FII moves in these two years. For one, the western economies (the US and much of European Union) were growing at a slower pace (US being an exception this year). In such a scenario, destinations like India started to look attractive for parking some part of their overall Asia Pacific corpus. The fact that India Inc. had invested its energies in restructuring since FY96 and becoming globally competitive helped their case. In the early part of 2003, Indian equities clearly became 'value' plays.

If we analyse the FII investment pattern in 2004, they invested heavily into the Indian equities in the first four months (till April). But as soon as it became clear that the reform oriented NDA government has been voted out, they beat a hasty retreat in May 2004. To the current government's credit, they managed to infuse confidence in India as an investment destination by continuing on the path to reform. Consequently, November and now December, are seeing strong inflows.

2004 FII stats
(Rs m) (US $ m)
Jan 31,768 698 5,696
Feb  23,975 527 5,668
Mar  56,044 1234 5,591
Apr  76,382 1687 5,655
May  -32,469 -738 4,760
Jun  5,164 118 4,795
Jul  9,136 201 5,170
Aug  28,923 630 5,192
Sep 23,856 515 5,584
Oct 32,633 707 5,672
Nov  67,406 1469 6,234
Dec 29,762 651 6,316
Total in 2004 till date 352,580 7,698  
Source: Sebi

But the global environment is changing. The US economy is slowly and steadily picking up. Interest rates too have gone up and the upward bias remains. And Indian equities though attractive, are now longer clear 'value' plays. Though India continues to grow at a steady pace, the sustenance of FII inflows cannot be understated. That in turn is dependent on India's relative attractiveness compared to other emerging markets. Having said that, India continues to remain on the FII radar as one of the most promising countries from a long-term perspective.

Perhaps realising this dependence on FII flows, the Finance Minister, in a recent statement observed that he will be happier if retail investors started to participate in the Indian equity markets in a bigger way, rather than the FIIs. The fact is that the FII money flows are not guaranteed year after year. India will have to continually live upto its promise of 'one of the fastest growing economies' and continually focus on infrastructure development to sustain FII interest. On his part, the FM, in a bid to attract the retail investors, will have to steadfastly focus on improving transperancy, investor awareness and empowerment, and to make the systems fool proof.

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