Foreign long term investors are looking at Indian markets with high level of interest. This is especially as they look out for fast growth options outside their own markets that are in stagnation. India definitely holds a lot of promise to them. This is due to the speed at which India is growing and the opportunities that she is springing up for global investors.
However, despite the 'growth' carrot, there are few concerns that foreign investors have as they see India as an investment option. One is the low depth in our equity markets that do not have the capacity to absorb large amount of inflows. And two, the low level of retail participation that has led to the Indian markets having less breadth. Add to this the high costs of trade and insignificant participation by India's own long term investors like pension funds.
But if India can get over these issues, our markets can triple in size by 2020. This is a view outlined by FICCI-McKinsey study. The study also outlines that India's stock markets have risen over six fold in the last 10 years despite these challenges. The country has also seen a number of regulatory reforms and has witnessed the launch of many financial products. But all this is past now. If the country is to see its financial markets reach the next level of growth, the above issues have to be taken care of.
We also believe so. There's no denying that India must embark on major reforms to expand the retail customer base. Or our markets will continue to depend on the mood swings of short term foreign investor. As we see now, FII inflows form more than 70% of the trading volume of Indian equity markets. This must reduce if we are to see less volatility in our markets.
Apart from this, the FICCI-McKinsey report suggests, "Moving the Indian pension fund market closer to international levels could potentially create equity inflows of up to Rs 2,500 billion at current levels." This is big money, and can change the face of India's financial markets.