Last few months have been abuzz with news of the much awaited reforms. As per some market experts, the big reform push has boosted FII (Foreign Institutional Investor) money flow in the country and driven the market rally. It is obvious that both are concurrent. But does it establish a correlation between the two? Do much hyped reform announcements really deserve the credit for downpour from FIIs? Well, discouraging though it may sound, a deeper analysis shows that the inflow has little to do with the reforms.
Those attributing BSE-Sensex rally to reforms may support their case with the fact that FII inflow per month almost doubled this year post reforms announcement. However, the logic holds little water. We all know a country's attractiveness as an investment destination is not the only factor that governs the funds flow. The FII flows have a lot to do with global liquidity conditions. And coincidentally, September 2012 was the month when the latter took a crucial turn. In early September (the week just before the first reform announcement), the main Western economies - US and Europe announced third round of Quantitative easing (QE3). QE3 was far more aggressive in its approach than the earlier rounds. The liquidity boost from QE3 led to foreign institutional investors (FIIs) flow across the emerging economies, of which India happens to be a crucial part.
The Sensex was already up by 16% year till date before the first reform was unleashed in mid September this year. As per the data compiled by a reputed institutional broker, around 55% of FII money that flowed in India came from came from global emerging market funds. This means that it is being directed from the funds that look at all the emerging economies (and not just India) as a better investment destination. And here the comparison here is with ailing Western world, hardly something to feel good about. Those hailing the reforms are perhaps not aware that while emerging markets are getting money, funds are being pulled out from specialized India dedicated funds.
It is good that India is getting money. But the Government instead of vaguely taking the credit for it should focus on the effective implementation of newly announced reforms. While the Government has already taken some tough stands, it should now implement policies that can revive the investment cycle and improve consumer sentiments. For only that will sustain and hold back the FII money in India markets once the global liquidity rush subsides.