Appreciating rupee lures FIIs in droves

Foreign institutional investors (FIIs) are rushing in to get registered in India. Those awaiting the registration are in no mood to while away the time as they buy stocks through the participatory note (PN) route on the back of better returns from the appreciating rupee.

In the last one month, over 30 new FIIs registered with the Securities and Exchange Board of India (Sebi), taking the total number of FIIs in India to 1,108. Some of the new entrants include ADI Alternative Investments (one of France's biggest fund houses managing 7 billion euros worth assets), APAX Partners Europe Managers (a UK-based firm managing $20 billion assets worldwide) and BAADR Service Bank of Germany.

After the Fed rate cut on September 18, FIIs have pumped in about $5 billion in the secondary market alone. It is believed that US-based hedge funds are the major contributors in the fresh inflows, according to senior executives of foreign brokerages.

"There seems to be no sign of the FII inflow drying up in the near future. Even some of the mid-sized fund managers, who have never tapped the Indian markets before, are planning to take exposure into the equity markets through the participatory note (PN) route," said a senior executive of a hedge fund on condition of anonymity.

PNs are offshore derivative instruments issued by FIIs to unidentified overseas investors, who are not eligible to invest directly in Indian stocks.

This calendar year has seen record foreign inflows of $14.4 billion into domestic stocks, beating $10.7 billion the FIIs invested in 2005.

Market players point out that the sharply appreciating rupee is one of the factors encouraging foreign players to park their money in India.

On Thursday, the rupee touched a nine-year high of 39.25 against the dollar. With the US economy struggling to come out of the subprime turmoil and fears of recession, analysts reason that at the moment only India, Hong Kong and China are emerging as a safe-investment destinations for FIIs.

Sandip Sabharwal, the chief investment officer of JM Financial Mutual Fund, said Indian markets still provided a lot of opportunity for foreign clients and there was momentum in the markets too.

Apart from the rupee appreciation, strong economic growth and the fast growth of Indian companies were acting as a catalyst for the huge foreign money flowing into India, he said.