Wary of fluctuations in European and US markets, foreign institutional investors preferred to park their money in Indian equities and invested over Rs 2,000 crore during the first quarter this year.
According to the market regulator SEBI's data, foreign institutional investors (FIIs) invested Rs 2,331 crore in the domestic market during April-June 2010.
CNI Research CMD Kishore P Ostwal said improvement in India's fiscal deficit was one of the factors for the FII growth.
"The Indian government has been able to generate huge cash flow from the 3G and BWA auctions, thus reducing their fiscal burden. Hence Indian markets proved to be a safer investment bet for the FIIs," he said.
During April, FIIs invested a sum of Rs 2099 crore. However, the European debt crisis compelled FIIs to pull out investment from high-yield emerging markets to settle debts in Europe, leading to a withdrawal of Rs 2,039.89 crore in May from the Indian market.
Notwithstanding the withdrawal, the inflow of Rs 2271.91 crore in June showed FIIs confidence in the long-term Indian growth prospects. The fresh funds inflow led to a net investment of Rs 2,331 crore in the first quarter.
Analysts say FIIs played a significant role in the domestic equity markets and their movement in terms of inflow and outflow of funds, triggered fluctuation in benchmark indices.
During the first quarter ending June 30, the benchmark Sensex scaled the 18,000-mark in April. It later declined to 16,069.78 on May 26 reflecting the sour global sentiment due to the Euro crisis, led by sovereign debt woes of Greece and spread to other nations including Spain, Portugal and Hungary.
However, the FIIs continued to repose faith in the domestic economic fundamentals by investing in blue-chips. This helped the index close the quarter with a gain of 0. 98 per cent or 173.17 points to 17,700.90 points on June 30.
Remarkably, the period also saw the Sensex making history in its 25 years of existence by closing in green for the sixth straight quarter.
Meanwhile, the European indices including France's CAC 40 fell by 13 per cent and American indices including Dow and Nasdaq nosedived 10 and 12 per cent, during the period under review.
"During the Eurozone debt crisis the Indian data showed positive signs. The GDP was healthy and IIPs figures were also good, which made foreign investors more confident to invest in the market. The rupee was also appreciating, thus giving them a good rate of return on their investment," SMC Global vice-president Rajesh Jain said.
Besides, FIIs have also invested a sum of over Rs 1,371.28 crore in debt instruments like government and corporate bonds and debentures.
FIIs remained constant as net buyers of debts unlike the equities where the sentiment in May turned negative, the SEBI data showed.
"Generally, FIIs invest in equities to have better returns on their investments, but when the situation is volatile, as it is now because of the Euro zone crisis, they park a portion of their money in the secured assets like bonds and gold," Ostwal added.
