FIIs ruling the roost

24 JULY 2010

Look at the net purchases of foreign institutional investors and domestic funds, for the first 4 days of the past week for which data is available:

Rs crores
 FIImutual fundsSensex

It was the foreign investors who pumped money into the Indian market; domestic institutions were net sellers. The largest asset manager in the world today is Blackrock, which controls $3.3 trillion in financial assets as per an article "America's 300 biggest money managers" in the July/Aug issue of Institutional Investor, of which the columnist is India representative. India's GDP is $ 1 trillion. Foreign funds flow can thus swamp any domestic flow.

As per the article, "Investors have finally bought into the argument that they should diversify away from their home countries and buy more international equities. Asset managers with global capabilities, such as giant Franklin Templeton, saw huge inflows in 2009. Investors pulled $39 billion out of domestic equity funds but stashed $30 billion in foreign equity in 2009."

Now the questions that need to be asked are 1. What will scare foreign investors away and 2. What are we doing to make them stay longer?

One of the factors that would scare foreign investors away would be panic situations like bank failures. Luckily the stress test of some 91 European banks revealed only 7 to be in danger, and requiring only $ 4.5 b. in additional capital. Investors were sceptical about the rigour of the testing; they had anticipated more banks to be threatened and more capital to be additionally needed. Of the 7, there were 5 regional Spanish banks called cajas, which would not be expected to threaten the system, and only 1 state owned German bank, Hypo Real Estate which obviously had overextended itself in mortgage loans.

Any failure of a financial institution could cause the FIIs to run to safety. Or perhaps a political crisis such as the threat by gadfly North Korea, which is threatening use of nuclear deterrent to prevent joint military exercise by the US and South Korea.

Domestically, the Indian economy is doing well, and slated to grow at 8.5% this year. Good monsoons will boost agricultural production on which 60% of the population depends, which would give them some spending power. However, to continue growing at this, or at a faster pace, two needs have to be met. The road network has to grow faster; Minister Kamal Nath has an ambitious target of 20 kms/day but we are yet to reach that clip. He seems confident of getting there. And the rail network has to also grow; Minister Mamta Banerjee seems to have less time for this than for seeking to become the next Chief Minister in West Bengal.

Fortunately the Government seems to be back on the reform track. After taking the decision to hike prices of petrol and diesel, it is now moving ahead on the GST (goods and services tax) front. This, by introducing simple and uniform indirect tax rate structure, with no leeway to State Governments, who will be compensated for loss of tax revenue on some items which accrue to them, will have a transformative effect on the economy. Issues still need to be sorted out, but we are on the right track.

The Unique Identity project is another step in the right direction, with a very competent person to head it. One hopes it will hugely stanch the leakages that take place in welfare scheme handouts. The corrupt middlemen, who are the current beneficiaries of the largesse, with, perhaps only 20% reaching the needy, would try their best to spoil the UADAI project; one hopes they are not allowed to.

In capital markets, SEBI is contemplating raising the bar to make open offers, to 25%, from the current trigger of 15%. After 25%, the acquirer would have to make an offer for the entire shareholding, thus not favouring existing promoters. The raising of the bar would help minority shareholders as raiders will be now able to acquire more stock, and existing management more keen to prevent it by buying more, themselves. The risk, as broker Arun Kejriwal points out, is that the shareholding needed to block special resolutions is 26%, uncomfortably close to the proposed new bar of 25%. An acquirer with 24.9%, together with a benami holder of 1.2%, purportedly not acting in concert, may use this to blackmail existing management by preventing any special resolution.

Corporate results for 65 companies are encouraging. Sales grew by 28%. Though raw material costs grew a whopping 61%, as commodity prices shot up, the operating profit growth was 23% and net profit growth was 33%. Higher net profit growth was witnessed in Zee and Sesa Goa.

The BSE-sensex ended the week at 18130, up 175 points, whilst the Nse-Nifty ended at 5449, up 55.

One needs to see the reaction of investors to the results of the stress test on Monday. If they believe the test was rigorous, and that there is no crisis in the Eurozone as hitherto believed, we would see a rally. If, on the other hand, they believe that the stress tests were weak, or the results fixed like a T20 match, then we would see a slump. There still are far too many problems in the developed economies. Thats good news for us because investors are willing, now, to look at increasing emerging markets exposure; they were sceptical earlier. As long as we govern ourselves well and don't shoot ourselves in the foot, we will continue getting more inflows. Together with increased domestic flows as the GDP grows at a fast clip, the story looks good for a long time. The biggest danger is with poor public governance. Lets hope they get that in Delhi.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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6 Responses to "FIIs ruling the roost"

Ralph Rau

Jul 28, 2010

Geo-political risks
A failing (failed?) state on Western border. Impossible Kashmir solution. The porous Nepal border on North as well as Bangla border on East. Chinese never ending claim on N-East. Chinese making huge investments in our Southern border state of S.Lanka.

Survival Risks
1.2 Billion stomachs dependent on vagaries of Monsoon. Erratic monsoon patterns due to Climate change

Internal Political Risks
Lack of national leader without Gandhi name or Gandhi protection. Continuing fragmentation of existing states. Pressure of water sharing. Naxalism.

The hot FII money can go out very fast when problems arise.


parjanya joshi

Jul 26, 2010

that is up to us. with a 1.4 trillion gdp growing at 8.5 % and savings rate of 35% domestic money can cock a snook at FIIs.either their belief in our economy is misplaced or we lack belief in ourselves



Jul 25, 2010

Truly a concise and straight from the hip report.
Yes, the prospects for India progressing as a vibrating democracy are bright, fortunately not dependent on government efficency but purely indian-enterprenal skills. The monsoon is also favourable this year.
respects- JIJINA- pune-26 July 2010.



Jul 25, 2010

dear sir
you have given an informative chart in the beginning of this view regarding the investment made by the the same chart we can see that the domestic MFs were net could have have explained MFs investment
policy ie why they took opposite line compared to FIIs


Anupam Garg

Jul 25, 2010

where else will the FIIs go? there hardly is a market better than India. I don't think anything will scare the FIIs now. Moreover, the new policies are only gonna make them stay longer. Its surprising that the author didn't put fwd his views on the new rules for acquisition...the increase in open offer limit. but as usual, all important issues were rightly pointed out


Ram Prasad De

Jul 24, 2010

The article is well crafted, helps to recollect the burning issues developed in recent past but lacks in in-depth analysis of sectoral performance.

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