The Hindu Business Line : The FII flood is unabated, but for how long?

THE Sensex soared from 6696 in January this year to 7844 in August... a 1100-plus point move that has left even the most optimistic of bulls pleasantly surprised. However, with the market movement purely driven by liquidity brought in by foreign institutional investors, the celebrations have understandably been muted.

With every swing of 100-plus points, questions about the onset of corrections have been raised. Indications now point to the interest rate cycle and the possible softening of US Fed rates next year. FII circles are planning asset allocation assuming that softer Fed rates will imply better corporate earnings by US companies, making returns from investment in the US and connected South American markets more attractive.

"Currently, returns from markets like India, Taiwan and Korea are in the top slot. Once the interest rate cycle in the US turns, we could see some of the money moving back to the American market. The current liquidity-led rally would slow down then," predicts Mr Andrew Holland, Executive Vice President, DSP Merrill Lynch.

During calendar year 2004, FIIs' investment in India was a whopping $8.5 billion. So far, in the first seven months of the current year, FIIs have invested over $7.3 billion, indicating that total investments for the full year would be a record breaker by a big margin.

Fuelling this increase in inflows into the Indian bourses is the participatory note route. Sources at Securities and Exchange Board of India reveal that the participatory note business of FIIs has doubled and stands at 40 per cent of all inflows.

With market capitalisation of the Indian market inching closer to that of Taiwan and Korea, it is no longer a market that can be ignored.

The question at this point, according to a FII analyst, is where would funds go if not to emerging Asian markets. One possibility is the reversal to developed markets, if economic conditions there improve. The other possibility is the discovery of another emerging economy. If Indian bourses continue to rise unabated at the current rate of growth, it forces global fund managers to make other bets. "It is now a question of when, not if," he added.

In the meantime, retail investors who panicked when the Sensex zoomed to the 6500-level are coming back to the party. According to data from the Association of Mutual Funds in India, equity funds saw net inflows of over Rs 4,300 crore in July alone. However, with the markets trading at all-time high levels, domestic fund managers are biding their time for suitable entry points. They were net buyers by a mere Rs 504 crore in July.

Their guess about when these entry opportunities would present themselves is as good as that of their global counterparts.

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The FII flood is unabated, but for how long?

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