Is India Now The Favourite Destination Of FIIs?

It seems that foreign institutional investors (FII) are regaining interest in the Indian markets and are pumping money once again which has helped the markets to strongly move northwards. The markets in September 2012 have appreciated by around 7.65 per cent on a month-on-month basis. The FIIs have also received double benefits as on one hand the markets have appreciated while on the other the rupee has also gained in strength by around 6 per cent in the last one month. One of the reasons behind this scenario is the heavy inflow from the FIIs with a net investment of around Rs 20,807 crore. So what’s driving the FIIs to the Indian markets?

The answer is related to the government’s strong action to move ahead the long and pending reforms. A nod has been given to pending reforms like FDI in multi-brand retail, aviation and broadband with the possibility of FDI in insurance and pensions too. We at Dalal Street Investment Journal believe there could be some pressure from the opposition political parties for FDI in multi-brand retail. However, the markets have welcomed the FDI proposals in the other sectors. The latest media reports suggest that the finance minister may make some positives moves for the housing sector and also roll out a fiscal reform plan.

On the disinvestment front the government has already shortlisted companies and would carry out the process soon. There is also a plan to sell its stake Axis Bank, ITC and L&T. This would ease the pressure on the government for getting adequate revenue to meet its deficit. These positives from the domestic front have led the FIIs to invest fresh funds in the markets. The current global environment is also responsible for this interest in India.

Quantitative easing in the U.S. would result in inflow of funds in the markets while Europe is still surrounded by its own issues. Also, the other Asian markets are not looking as good as India. China is facing lots of headwinds and its government is taking some desperate steps to revive growth. Therefore it seems that the best investment destination for FIIs is probably India and the impact of the same has been clearly felt in the markets.

The FII investments have also resulted in a demand for the rupee, resulting in a sharp appreciation against the dollar. The rupee has gone up from Rs 56 per dollar to Rs 52.50 per dollar in less than a month. Usually FII investments have a meaningful impact on the market as they enter and exit with a big bang. The volumes and turnover they deal in are very high, resulting in market volatility on either side. Further, they are market participants who have a sound knowledge of a particular country and react accordingly. FII inflow into the markets is one of the important indicators which one should watch out for as the inflow takes the markets higher and vice-versa. The following table shows the monthly net FII and DII investments and the market returns over the last one year: