The Hindu Business Line : FIIs stay rooted

Remember the great crash of May 2006, which saw the BSE index Sensex shed more than 2,000 points in one month and fingers pointed at the Foreign Institutional Investors with some gentle nudging by the country's tax department? The latter was believed to be threatening these investors with a hefty tax bill if their investments had yielded profits.

As it happened, neither the taxmen spooked them nor the prospect of rising yields on US Treasury investments tempted them to pull out in large numbers. They may have sold large quantities of stock in the market then, but equally, they also brought enormous sums of money into the market.

And it is all now official.

According to the Balance of Payments data released by the Reserve Bank of India for the first quarter of the current fiscal, portfolio investors took out on a net basis, a shade less than 1 per cent of their total holdings in the Indian stock market. They remitted during the first quarter of 2006-07 $526 million against a cumulative net investment of over $55 billion in portfolio investments - comprising both equity and debt, but predominantly equity - ever since the market was opened up to overseas investors back in 1992.

In absolute terms, overseas portfolio monies to the tune of $31.327 billion went out. But equally, there were also inflows to the tune of $30.801 billion, thus resulting in a net negative inflow of roughly half-a-billion dollars.

Neither is the negative inflow in May this year a first for the Indian stock market. For three successive quarters beginning April in 1998-99 and then again twice in the fiscal 2002-03 (April-June and July- September), the market witnessed negative inflows.

Though such negative inflows then were about $700 million and $400 million respectively, as a percentage of net investments, the latest outflow must be viewed as relatively small compared to those occasions as portfolio inflows kept rising steadily over the years. Overseas investors that stuck around through the difficult times of slowdown in the Indian economy back in 1998-99 or weathered the Ketan Parekh-induced meltdown in 2002-03 have been handsomely rewarded. The market, which was languishing with the Sensex hovering in the 3,000-4,000 mark right through this period, suddenly decided to make up for lost time and thus more than trebled in value since then.

The Indian market may attract the odd hedge fund types that come in around New Year's time only to exit by Christmas next.

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