FIIs worried on overvalued scrips

Foreign institutional investors (FIIs), who have about $50 billion exposure in the country's equities, may be concerned over excess valuation of stock prices in general.

They, however, still see a bright future in the economy, driven by domestic consumption, rising incomes, booming infrastructure and surging corporate earnings.

"We have a positive view on India's economic development. There are certain common themes such as overall consumption (of people) driven by rising incomes and savings and infrastructure," said Richard Wastcoat, managing director of Fidelity Investments International.

"I cannot comment on our house view on India, as the investments in the Indian markets are held in a range of different funds," he hastened to add. Fidelity manages a corpus of over $4 billion through several India-specific funds.

Global fund houses such as Merrill Lynch and Goldman Sachs too echo the same view. "The consumption cycle continues to be strong, though rising interest rates are likely to slow growth rates slightly. However, over the next few years, infrastructure spend will continue to be the bigger driver of economic growth," said Jyothivardhan Jaipuria, an analyst at Merrill Lynch, in a report last week.

Rising income levels mean higher spending on mobile phones, computers, automobiles, more home loans, more purchases from retail malls, resulting in higher revenues for telecom operators, automobile companies, banks and retail chains, among others.

"The rapid spread of mobile phones from a very low base provided a fillip to communications, further boosting productivity. Today, India is the fastest growing market for mobile phones, with average growth rates of over 80 per cent every year since 2000," said Tushar Poddar and Eva Yi, analysts at Goldman Sachs, in a recent report.

Wastcoat of Fidelity pointed to the risk elements such as a major correction in the emerging markets, including India, impacting liquidity.

While information technology, communications and entertainment (ICE) sector was the key theme of the late 1990s, before the tech meltdown, this time the growth looks more healthy and sustainable through a new ICE, namely, infrastructure, construction and engineering sectors, said an analyst of a Europe-based FII. "We are bullish on top stocks in the infrastructure, construction and engineering sectors," she added.

Commenting on the impact of rising income levels of the middle class, Pradeep Dokania, head, private client business, DSP Merrill Lynch, said: "The investments coming here are basically creating jobs, which have led to wealth creation at the base of the society. Rising number of HNIs does not only mean more tax collection, it also means added spending power, which, when tapped, gives scope for more employment."