FIIs have long been considered the reason Indian stock markets have gone up and collapsed too. How much of this thinking is true? What would the coming months be like? For the non-quant investor, B&E brings a seat-of-the-pants primer to understand the FII hype!
An ‘Investment Confidence Index’ report released by JP Morgan Asset Management in October 2009 had said that a majority of investors and advisors expected the Sensex to climb back to somewhere between 18,000-19,000 by March 2010. The same survey also found that 93% of advisors and 68% of retail investors were positive about the Sensex to rise from the prevailing level (in October 2009) of 16-17,000. Those expectations hinged on prospects of a global economic recovery coupled with a sustained confidence on the Indian economy across the board.
Well, six months since the survey, those expectations seem to have come true with the Sensex currently trading at close to the 18,000 mark. Surging inflow of Foreign Institutional Investors (FIIs), more so after the announcement of the Union Budget 2010-11, is said to have been the real reason behind the good show witnessed at the market place. Statistics does corroborate the fact that net investment made by FIIs in just 15 days post February 26, 2010, stood at a mind-boggling Rs.114.80 billion. Keeping in pace with the FIIs, the BSE benchmark index too surged 8.5% to 17,644.76 on March 26 from 16,254.20 on February 26. But is the presumed correlation between FII and market rise for real?
Digging into a subjective interpretation of the correlation between the Sensex rally from 2006 to 2008 and FII investment for the same period, one can see that when the Sensex crossed the 15,000 mark for the first time, net FII investment was Rs.31.79 billion. When the Sensex crossed 17,000 mark, the net FII investment strangely had fallen down to Rs.10.04 billion. At 19,000 mark, FII investment was lower at Rs.7.81 billion. But suddenly, when the Sensex breached 20,000, net FII investment was at Rs.18.48 billion. That puts paid to the theory that FIIs have mostly been the reason for the rise in Sensex. FII’s contribution to the rise of the Sensex is more psychological than real.
But what is worth noticing is that on October 27, 2008, when the Sensex dropped to 7,697.39, it was triggered by a mega FII pullout of Rs.11.78 billion. Even more shocking was the fact that net selling in October itself was to the tune of Rs.134.6 billion. With Indian stocks melting under the heat of a global crisis, in 2008 overseas investors pulled out three out of every four dollars brought in in the previous year. During a year when Indian stock market lost its valuation by more than half, FIIs pulled out an estimated Rs.598 billion from the domestic bourses – an amount equivalent to nearly three-fourth of over Rs.782 billion invested in the stock markets in 2008. It’s clear that while in previous cases, the fall in FII flow did not result in a Sensex fall (and in fact resulted in Sensex rising to historic levels; leading to FIIs returning), significant and sudden FII pull-out does cause Sensex crashes. Thus, for the forcefully non-quant investor who shuns number crunching like plague, if there were an analysis needed to be done with respect to FIIs, one would simply say that past [subjective] correlation shows that while FIIs might not be singularly responsible for each and every Sensex rise, they’re surely more or less responsible for one of the biggest recent index crashes.
But why do FIIs play on this hype and invest in India? Bundeep Singh Rangar, Chairman, IndusView Advisors Ltd, an India-focused cross-border advisory firm, explains, “India’s high savings rate of 30.7% – compared to a paltry 1.8% in the US and 1% in the UK – is indicative of the lower propensity to invest among Indian households and hence signifies the scope of potential investments that can move into the Indian equity markets if these households are assured stability and increased return on investments.”
Amir Moin
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Source : IIPM Editorial,2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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