FIIs back in Indian markets

As of now, 516 FIIs are registered with the Securities and Exchange Board of India, the market regulator in India. These FIIs have brought in over US dollar 8.8 billion since 1993 when the Indian markets were opened for foreign institutional investment by the government.

According to SEBI officials, FII investment had fallen in May andJune following the crash in other Asian stock markets and currencies, sanctions imposed on India after the nuclear explosions, downgrading of India’s rating by global rating agencies like the Moody’s and the fall of the rupee.

As all these events took place one after another, FIIs got panicky and started offloading Indian shares in a big way. Indian institutions like UTI tried their level best to take the FII selling onslaught but due to limited resources at their command, they could only help stem the slide to a limited extent.

Many FIIs had lost money in the Asian markets in the last one year. "It is difficult to believe that they will come back to India so soon. FIIs are going to safer markets in Europe and the US. But India is considered a safe market in Asia when compared to Thailand, Korea, Hong Kong and Malaysia,"said an FII source.

Added the analyst of a foreign brokerage firm, "now that the dust raised by the nuclear explosion is slowly settling, FIIs will invest more in India. The governmentis safe for the time being, the fall in the rupee value has been arrested and sanctions have not affected India in a big way."

Shares of Indian companies where multinationals have sizeable stakes (like Hindustan Lever, Britannia and ITC), software and pharmaceutical companies have already appreciated. Of late, there has been a gradual rise in FII buying in fundamentally strong shares.

However, FIIs and Indian investors are worried about the recession in many sectors. As many as 93 industry sectors including steel, cement and capital goods reeled under negative or moderate growth rates during the first quarter of the current financial year, according to a survey by the Confederation of Indian Industry (CII), the leading industry association.

"Even though the Indian markets were earlier not directly influenced by other Asian markets, things have changed now. FIIs who are operating in Malaysia, Hong Kong and Singapore are in India also. When they face problems in those markets, they will sell in India toneutralise the losses," said a SEBI official.

Indian markets which lacked depth and players with deep pockets are now looking at FIIs for direction.

However, experts like former BSE president M G Damani are skeptical about FIIs bringing in more funds. "World experience has been that portfolio investment by FIIs is hot money and it moves out as fast as it comes in. FIIs are more prone to herd mentality than individual investors, particularly when events like downgrading take place. FIIs just start dumping whatever can be sold and at whatever prices. It will not be an exaggeration to say that they virtually go berserk," Damani said.

FII analysts and Indian brokers unanimously feel that the government should vigorously pursue reforms in various sectors to attract more foreign investment. The government needs massive funds for infrastructure development which can be raised from the market.