FII INVESTMENTS The level of foreign institutional investments in the Indian stock market has become a very important indicator of investor confidence. Strong FII participation is good from the domestic investors' point of view in the sense that it leads to enhanced liquidity and greater depth. However, they also tend to pull out in tandem, which induces a lot of volatility into the markets. If the chart below is anything to go by, India has surely shot up on the FII radar over the last few years. FIIs - INDIA CENTRIC! (Rs bn) (Sensex) 250 FII Inflows Sensex (RHS) 20,000 163 15,500 75 11,000 (13) (100) 6,500 (188) 2,000 Mar-02 Feb-03 Jan-04 Dec-04 Nov-05 Oct-06 Sep-07 Aug-08 Jul-09 Source - SEBI After pumping in a mind-numbing Rs 731 bn in FY07 and FY08 combined, FIIs pulled back with the onset of the global financial meltdown and took off Rs 477 bn from the Indian equity markets in FY09. This played a significant part in the losses that saw the benchmark Sensex decline by more than 38% during the period. With valuations running way ahead of fundamentals, this was expected and in fact, much bigger losses seemed to be on the cards. However, FII interest made a comeback in March 2009 and almost Rs 415 bn had been redeployed into the Indian markets by July 2009. With the entire outflow in FY09 almost being compensated within 6 months, the Sensex has galloped 62%. There is little doubt then over the correlation between the direction of FII money and the Indian benchmark indices. NO. OF FIIs REGISTERED IN INDIA 1750 1400 1050 700 350 0 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Source - SEBI Another indication of FIIs considering India as an investment destination, apart from the FII investments, is the ever-increasing number of FII registrations with the stock market regulator, SEBI. As can be seen in the chart above, these have increased from about 739 in July 2005 to 1,679 by July 2009 and have been increasing every month. The solid economic performance of the Indian economy in general and India Inc. in particular has played its part in the country getting more mind-share among foreign investors. Apart from this, the after effects of the global financial meltdown in the developed markets have been prompting foreign investors to invest in non-dollar assets, which is partially responsible for FII money flowing into emerging markets. However, any signs of reversal in any of these fronts would be viewed negatively and investors must remain alert, as this reversal would force FIIs (especially the momentum guys) to reallocate to better opportuni- ties. To conclude, while there is no denying the role that FIIs have played in making Indian indices reach unprecedented levels and the free fall from there, nothing should be taken away from the solid fundamentals and strong growth outlook for India Inc. Therefore, it is these factors that investors should look at rather than worrying about FII investments. For as the old adage in investing goes, "Be concerned about the value and the price will follow." Happy investing!
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