With the country facing all possible problems including the risk of a sovereign downgrade and almost no action on reform front, Indian growth story is losing steam. Given the scenario, it is surprising that India is attracting highest overseas money in the stock markets among the Asian peers. But few are bothered to solve this riddle. After all, stock markets do run on sentiments and people would prefer to make the most of it rather than spoiling the party. But that is not completely true.
What will sustain the rally is the source and quality of the money. With SEBI (Securities and Exchange Board of India) not disclosing the source and investor category, there is no way to confirm this. Infact, as per a global fund tracker EPFR, the amount invested by foreign funds is just US$ 1.1 bn this year versus US$ 12 bn as suggested by SEBI. The anomaly raises questions regarding the accuracy of SEBI's data. Also, if EPFR'S data is correct, there are high chances that the money stock markets are getting is being routed from India to Mauritius and then back to the country with the sole purpose to avoid tax. With Mauritius route getting GAAR (General Anti-Avoidance Rule) breather, the trend may continue for some more time. The fact that we don't know and can't confirm the veracity and source of such inflows raises serious doubts about financial management in this country. How can we control the economy when we don't know the source and quality of the money that is flushing around?
If the overseas money inflow is driven by foreign investors' faith in India's growth story, we will not be surprised to see the rally reverse due to policy logjam in the country. On the other hand, if this is on account of round tripping of funds, sooner or later the funds are bound to dry up. The inflow of speculative money is not something to cheer about and encourage. The same led to havoc in ASEAN economies in the late nineties and we for sure don't want the pattern to repeat here.