FII dependence proves costly

Market may have become more robust but depth is still lacking

The market is buzzing with concerns over foreign institutional investors (FIIs) outflows in the last one month but a more pertinent question has arisen now.

Brokers said that there is a possibility that as a fallout of a changing global investment scenario, emerging markets including India, may get rerated by big investors.

"In this scenario, even a neutral stand from FIIs can be detrimental to India," analysts said.

Lack of institutional participation, mainly foreign, in the last one month is a growing concern, a dealer from a domestic brokerage house said.

Though it is not the outflow but a possible lower allocation of new money is the bigger threat, he added. If that happens, the best may be behind us in terms of a sustained equity market rally, analysts added.

FII were net buyers of Indian shares worth Rs 1,245.60 crore in January 2005, Rs 7,823.40 crore in February, Rs 7,513.20 crore in March and were net sellers to the tune of Rs 703.43 crore in April.

Some high-value block deals such as Bharti Tele-Ventures (worth Rs 2,441 crore) and big initial public offerings such as those of Jet Airways and Punjab National Bank had accounted for higher FII inflows in the first few months of 2005.

Incidentally, the market has continued to dance to the FII tune, highlighting the fact that our market may have become more robust but the depth is still lacking.

Volumes have also been consistently lower as domestic institutions and other big investors took a cue from the FIIs.

N K Garg, chief investment officer at Sahara Mutual Fund, said, "There is a need for stronger dominant alternate investor groups in the market to increase depth and reduce volatility.

This will help the market mature faster." India as a fundamentally strong growth story remains and barring some external factors which may have a cascading effect in the short term, the market looks good in the long term, added a dealer from Motilal Oswal Securities.

The Bombay Stock Exchange (BSE) Sensex has been mostly rangebound in 2005 with a negative bias, marked with some intermittent relief rallies.

The Sensex has fallen almost 5 per cent from 6679.20 on January 3, 2005 to 6359.65 on May 5. The Sensex had crashed almost 7 per cent in April, the same month that the FIIs recorded an outflow.

Analysts added that there could be some respite as recent data show that the US growth rate has hit a soft patch, which could impact inflationary expectations.

In this scenario, the extent of the US interest rate hikes may be capped. This would entail that FII money will continue to flow into emerging markets. This fact is supported by a weakening US dollar, they added.