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Tuesday, May 18, 2004

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Can domestic FIs do the rescue act?

Aarati Krishnan

WHEN the markets go into a free fall, the Government often seems to look to domestic institutions to do the rescue act. But as drivers of market liquidity, domestic institutions still appear to be dwarfed by the FIIs.

Just in four months between January and now, FIIs have made net investments of Rs 17,000 crore in Indian equities, buying about Rs 80,000 crore worth of stocks and selling about Rs 63,000 crore worth.

The equity operations of the domestic institutions pale in comparison to these numbers. Based on recently released numbers, LIC - among the largest domestic institutions - managed an equity portfolio of Rs 22,000 crore in March 2004, with its gross purchases in the current year likely to be in the region of Rs 11,000 crore.

LIC announced that it planned to step up the equity exposure from nine per cent of its investible funds (which are at Rs 3.40 lakh crore) to 10 per cent this year.

While this suggests that LIC could make a fresh investment of about Rs 11,000 crore in stocks in 2004-05, it would be simultaneously booking profits on its existing holdings to generate returns for its policyholders. So, its net investment in equities would be much less than this figure.

GIC, with an equity portfolio of about Rs 2,500 crore as of March-end 2004, is a much smaller influence on the stock markets than LIC.

After its restructuring, UTI can no longer be expected to step in to buy into the stock markets at the behest of the Government. In fact, the equity portfolio of UTI-I - which houses the assured return schemes and is managed on behalf of the Government - shrunk recently after it sold PSU stocks and paid back the Government Rs 3,300 crore initially invested by it to bail out the US-64 scheme.

The residual portfolio was said to be worth about Rs 2,800 crore and this was before the crash in PSU valuations.

Inflows into domestic equity mutual funds, including UTI Mutual Fund, have picked up pace over the past six months, recorded gross figures of about Rs 10,000 crore over the first quarter of 2004.

However, to depend on domestic equity funds to counter selling pressure from FIIs may be leaning on a thin reed.

For one, pullouts from equity funds too have picked up pace with the rising markets, resulting in gross outflows of Rs 6,400 crore from such funds over the quarter.A s a result, domestic equity funds were left with net inflows of just about Rs 2,600 crore in the first quarter. Secondly, the experience from the previous bull markets shows that inflows into equity funds usually pick up at the height of the bull markets and dry up if there is a sharp market reversal. If this pattern is repeated this time round, one can probably not count on domestic funds to continue on a buying spree if a deluge of FII selling hits the equity markets.

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