The foreign fund party

A little below seven months after angry brokers asked if there was anybody out there to protect a free-falling market, foreign funds are in ...

A little below seven months after angry brokers asked if there was anybody out there to protect a free-falling market, foreign funds are in the driver8217;s seat. And they are pushing the pace.

The benchmark Sensex has shot up from 4,505 on May 17 to a new peak of 6,322. Some say the sky is the limit. Others say a correction is inevitable. But for now, it8217;s party time.

First, the numbers. Net investment by FIIs registered with Sebi has hit a whopping 7.5 billion mark 6.6 billion in 2003. This is the highest annual FII inflow so far since the market was thrown open to foreign funds in 1992-93. In the last two weeks, FIIs have touched almost all sectors 8212; from pharma to automobile, oil to chemicals. And after high-profile giants like CalPERS and Fidelity, other funds are rushing into a market they have ignored all these years.

The Entry Factors

Put simply, they are here as there are not many investment avenues globally, thanks to the tumbling dollar. The US currency has plunged to new lows against the euro and other major currencies. 8220;The dollar is losing its sheen 8212; it has lost 25 per cent against the euro and is expected to lose 15 to 18 per cent against the yen,8221; said Ajay Bagga, CEO, Kotak Mahindra Asset Management.

In these circumstances, foreign investors look at new options to hedge their risk. Gold, being one, has given spectacular results. The other hedge is equity markets in emerging economies, which offer higher returns and less risk compared to developed markets. 8220;The current price-earning P-E ratio of the Indian market was 18 and there were many investment opportunities in mid- and small-capital segments,8221; said John Ross, Executive Director of US giant Fidelity, which has invested 1.4 billion and is now setting up a mutual fund in India.

nbsp;	THE IMPACT

		nbsp;	8226; FII stakes in In dian cos rising 8226; FII money adding to liquidity 8226; Sensex hits all-time peak 8226; Forex kitty rises to over 126 bn 8226; Rupee zooms, hits seven-month high	nbsp;

Bagga adds that FIIs, by nature, would go for domestically strong economies. 8216;8216;Countries like Taiwan, Malaysia ride on the Dragon. Any change in China, and they feel the effect.8217;8217; FIIs find India8217;s strong economic fundamentals attractive. GDP is growing at 6-6.5 per cent, exports and forex reserves are surging, and corporate performance is excellent. 8216;8216;A stable government and an overall good corporate report card have only seen more foreign money pouring. This rally also shows that while in 2002 the interest was only in technology stocks, today the trust is across sectors,8221; said Girish Bhutra, head of equity trading, Emkay Shares. The year 2005 could witness more action. FII sources say the market is awaiting a fresh infusion that could touch 10 billion, starting this January.

The Exit Factors

As they say in the market, stocks cannot go on rising and rising. FIIs would exit 8212; that too faster than they entered 8212; at the first sign of trouble. If 7.5 billion has come in 2004, it can disappear in days. Total FII investment now is almost 30 billion. This is around 8.9 per cent of India8217;s total market capitalisation of around Rs 15,11,000 crore.

Story continues below this ad

If developed economies like the US start doing well, FIIs will start pulling out and deploy their funds in those countries. Similarly, if the economic fundamentals take a turn for the worse, the flow will reverse. 8220;When the money flows, it8217;s like a flood8230; while coming in or going out. They FIIs even ignored the Left8217;s role in the government,8221; said a fund manager.

So far, so good. There8217;s no bad news at the moment. The problems in the Reliance group appear to have cooled down. Oil prices have come down. FIIs could tighten their control over Indian companies. The dollar willing.

With Smita Nair