Foreign hot money chasing stocks

Foreign funds are back in action. Two years after driving the market to dizzy heights in 2000-01, foreign funds seem to be on a buying-spree...

Foreign funds are back in action. Two years after driving the market to dizzy heights in 2000-01, foreign funds seem to be on a buying-spree again. Foreign institutional investors (FIIs) pumped around Rs 7,100 crore (over $1.5 billion) into the Indian markets (equity and debt) in May and June of 2003.

Thanks to this huge inflow of hot money, the fancied Sensex vaulted by over 700 points (nearly 24 per cent) to 3,622.34 in the last two months. The massive inflow has taken the net FII inflow in the first six months of 2003 beyond the Rs 10,000-crore mark to Rs 10,546 crore.

FIIs hold 10% market cap

MUMBAI: Foreign funds have invested Rs 69,495 crore ($17.53 billion) in Indian markets in the last nine years. This is almost 10 per cent of the total market capitalisation of around Rs 7,20,000 crore. Though this is not a big amount, if FIIs pull out this money suddenly, it can create a major collapse of the market.

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According to market sources, most of these funds were brought in by hedge funds which are not directly registered with market regulator Sebi. “As they issue participatory notes or operate through FII sub-account route, their operations need to be watched closely,” said a market source, adding, “they can pull out even faster, thereby creating turbulence in the Indian market.”

It may be recalled that OCBs (overseas corporate bodies) played havoc in the market during the 2000-01 boom-and-crash period. “Most of the OCB funds were sent out by Indians which came back in the OCB form. Similarly hedge funds or participatory notes will remain mysterious as the identity of their clients may not be known,” he said.

The market was also agog with rumours that Warren Buffet, the richest investor (with an estimated wealth of $30 billion), is active in the Indian market. Buffet’s Berkshire Hathway — headed by India-born Ajit Jain — was said to be targetting oil and gas stocks.

If foreign funds remain bullish on the Indian markets in the coming months, the net FII inflow for 2003 will surpass the record inflow of over Rs 13,292.70 crore in 2001, the highest inflow seen in the Indian markets since 1994, when FIIs made their debut in India.

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“Portfolio inflows of FIIs have seen a sharp jump over the last few weeks and this has driven the recent rally,” says Suhas Naik, fund manager (equity), IL&FS Mutual Funds. In June 2003 alone, foreign funds invested Rs 3,461 crore. This is the highest inflow in a single month in the last two years. With this, the total FII investment in 2003 has touched Rs 10,546 crore as of now.

The inflow in June 2003 was mainly contributed by equity purchases which accounted for over 75 per cent of the total FII money. “FII inflow is basically hot money. It can be pulled out any time. The outflow can be even faster,” said a former UTI official.