Study finds Sensex rally-FII correlation weak

Accepted wisdom suggests foreign institutional investors (FIIs) and behaviour of the southwest monsoon set the domestic stock markets' direction.

However, a new study suggests the correlation between stock market behaviour and both FII investment flow and monsoon behaviour is low and at times inverse.

"Since the advent of FIIs, it has been axiomatic that financial market returns are linked to their investment-attitudes," a study by National Council of Applied Economic Research (NCAER) said.

"However, it is interesting that the market direction has been inversely related to the FII attitude for the past two quarters," the study said.

According to NCAER, FIIs invested Rs 16,600 crore during the January-March quarter but the 30-share Bombay Stock Exchange Sensex lost 1.7 per cent during the period.

In April-May, the FIIs pulled out roughly Rs 2,700 crore but the markets gained 3 per cent during the period, NCAER said.

One reason for this could be that one-third of FII investments in January-March were deployed in public issues and one-fifth in block off-market deals.

"Nevertheless, negative correlation means FII investment attitude is not a reliable indicator of market direction," NCAER said.

As far as the monsoon is concerned, the study said, pronouncements about it have little predictive value in terms of market velocity.

It said there was very little correlation between normal or deficient monsoon and stock market behaviour in the last 15 years.

According to the study, over the last 15 years, stock market returns were positive during the July-September quarter "" five times when rains were normal and four times when monsoon was below normal.

The southwest monsoon season starts June and ends in September.

"The July-September quarter has yielded positive (stock market) returns on nine out of 15 occasions, even though there's little correlation between those returns and rainfall patterns," the study said.