Re meets fiscal deficit, $ buys India Inc pie

FIIs poured Rs 38,218 cr into the equity markets in 2004.

What is the colour of money? Black or white, right? Wrong. In the Indian context today, it is redefined as foreign or domestic.

Foreign money is flowing into the stock market for a pie of Corporate India while the domestic currency, routed through various savings schemes, is being used by the government to meet its fiscal deficit.

In calendar year 2004, foreign institutional investors (FIIs) poured Rs 38,218 crore (over $8.5 billion) into the Indian equity market.

In contrast, data from the Securities and Exchange Board of India (Sebi) show that domestic mutual funds pared their exposure to the equity market by Rs 1,077 crore.

The total assets under management of the Indian mutual fund industry on December 31, 2004 were Rs 1,50,537 crore. Of this, equity assets were about Rs 36,575 crore, less than a year's net FII inflow.

A Reserve Bank of India (RBI) estimate puts the flow of money from the household sector to shares and debentures in 2003-04 at Rs 7,554 crore. This is inclusive of debentures. Money market trackers say the proportion of debentures will be more than equities. For the calendar year 2004, the quantum will not be very different.

The other sources of domestic funds flow in the equity market are banks and the insurance sector. Banks are allowed to invest up to 5 per cent of their incremental net time and demand liabilities (NDTL) in the stock market.

However, except for a few private sector banks, by and large, Indian banks are averse to the idea of investing money in the stock market. Analysts said the industry's exposure to the equity market could be just about half a per cent of its NDTL.

Banks' NDTL rose by about Rs 1,50,000 crore in calendar year 2004, so the flow of bank money to the equity market could be around Rs 750 crore. The banking sector's outstanding exposure to the stock market was Rs 2,490 crore in 2002-03, which went up to Rs 3,214 crore in 2003-04, pegging the incremental market exposure at Rs 724 crore.

Analysts put the flow of insurance sector money into the stock market during the year at around Rs 20,000 crore. Insurance players are allowed to invest up to 35 per cent of the incremental premiums in market securities, which includes bonds, debentures and equity. The insurance industry's premium accretion during the year was around Rs 70,000 crore.

FIIs do not buy stocks only in the secondary market. Their presence in the primary issues is also growing. In calendar year 2004, 25 primary issues hit the market, raising Rs 30,000 crore. The share of the FIIs in this pie was to the tune of Rs 11,500 crore. This is, however, part of the overall Rs 38,218 crore FII inflow into India last year.

So where is the bulk of the domestic savings going? To bridge the fiscal deficit. The government is the biggest user of the domestic savings.

In fiscal year 2003-04, Rs 54,182 crore of household sector savings flowed into provident and pension funds and another Rs 74,000 crore went into small savings, special deposits and so on. ("claims on government", in RBI parlance).

Add to that the over Rs 1,20,000 crore of net funds that flowed from the banking sector towards buying gilts of the Centre and the state governments and another Rs 30,000 crore investment by the insurance sector in government papers. (The insurance companies can put up to 50 per cent of their kitty in gilts. However, unit-linked plans are exempted from this stipulation.)

The total works out Rs 2,78,182 crore. This matches the combined gross fiscal deficit of the Centre and the states in 2003-04 (Rs 2,73,057.2 crore).

So directly (through small savings and PFs, etc) and indirectly (through bank deposits and insurance premiums) the government is using the savers' money to manage the fisc, while the FIIs are using the greenback to invest in corporate India.

This trend is likely to continue, with the FIIs putting in over $1 billion (Rs 4,400 crore) in the last six trading sessions on the Indian bourses. "The flow will continue irrespective of the US interest rate or the value of the dollar, as the India story is no mere hype; it's a reality now," says a foreign brokerage.

So, the rise in the market capitalisation is more significant for the FIIs than the risk-averse Indians, who are content in celebrating the EPF rate hike.

FIIs: Streets ahead
Foreign funds: Poured Rs 38,218 cr into the Indian equity market in calendar 2004

Household sector: Invested Rs 7,554 cr in shares, debentures in 2003-04

Mutual funds: Pared their exposure in equity by Rs 1,077 cr

Banks: Invested Rs 750 cr in the equity market