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FIIs: Targeting India

Dec 29, 2004

The Indian indices have continued to head higher into uncharted territories on the back of sustained FII inflows, which has been the primary factor responsible for the bull run being witnessed on the Indian bourses. The huge FII participation over the last couple of years can also be gauged from the fact that after pumping in over US$ 6.5 bn in calendar year 2003, the flows were consistent throughout 2004 (US$ 8.5 bn at last count). While a falling dollar has aided this inflow, the fact that India remains one of the fastest growing emerging markets has also played its part in attracting FII inflows.

The chart above shows the rise witnessed in the number of FIIs registered with the stock market regulator, SEBI, over the last couple of years. The registrations have increased from 495 in January 2003 to the current 638. And this includes some of the most respected names in the investment world like that of CalPERS (California Public Employees Retirement System) and Fidelity International Investment Advisors, which practice sound investment policies and decide upon a country for investment only after affirming the fundamentals of a country.

However, while many of these FIIs seem to have a long-term investment approach and are betting primarily on the fundamentals of India Inc., the fact that quite a few of these are here to only ride the bull run cannot be ruled out. Further, another problem as seen by Ajit Dayal, Founder-Director, Quantum Advisors, is the structural imbalance that has been created over the last few months. It must be noted that while FIIs continue to be net buyers of Indian equities, domestic mutual funds have been net sellers in the recent past. This is evident from the net outflows of about US$ 300 m by domestic mutual funds in the current calendar year (including last 7 months of consistent outflows).

Thus, considering that FIIs have been the primary drivers of this rally, any adverse development on the global or the Indian front could see this a reversal in money flow (akin to May 17, 2004) leaving Indian investors in a lurch. Also, rising US interest rates might be a big reason for the 'much-touted' FII money to reverse direction and move towards the safer US treasury bills and bonds.

While the current strong growth of the Indian economy has also played its part in attracting foreign investments, any signs of fatigue on this front would be viewed negatively, which would force FIIs to reallocate to better opportunities in other emerging economies. At the same time, retail 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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