Market’s mysteries

What sort of funds are exactly flowing into the Indian market?

By KS Chalapati Rao Delhi

Early in February, the leading indicator of stock prices in India, the 30-share Sensex, crossed the 10,000 mark.  The Sensex has risen almost continuously since May 2005 from a level of about 6,200, except for a fall during October-November 2005.  In fact, after the mayhem of May 2004, but for some intermediate corrections, the rise in the index has been almost gradual. Many reasons have been attributed to this performance, which include increased investments by Foreign Institutional Investors (FIIs), entry of new investors from countries like Japan, performance of the economy, a market-friendly government notwithstanding the occasional pulls and pressures applied by the Left, good show by corporates, efforts to improve corporate governance, low interest rates in developed countries, falling interest rates in India and favourable fiscal measures.  On the flipside, there have been rumblings about the nature of foreign funds, the damage that could be caused by their sudden withdrawal, laundering of money stashed abroad by resident Indians, increased volatility, etc.  There is no doubt that since the new government was formed at the centre, in mid-2004, there has been a surge in new FII registrations. Out of the present 837 FIIs, as many as 327 (39 per cent) were registered after May 2004.  Similarly, 45 per cent of the 2,305 FII sub-accounts have been registered after 2003.  There definitely has been an increased FII interest on India.

It needs to be underlined that India is not alone in experiencing galloping share prices since the beginning of 2005. The 10,000 mark may just be an important milestone for the Indian stock market. A comparison of Sensex with some of the emerging market indices shows amazing resemblance. While the Sensex increased by 58.37 per cent between  January 5, 2005 and  February 20, 2006, Bovespa of Brazil, Kospi (composite) of Korea and IPC of Mexico also moved in tandem. On the other hand, China, Taiwan, Malaysia, Indonesia, Hongkong, and Thailand have been major laggards. Obviously stock market performance is no reflection on China's economic performance and its future prospects. Given the view that FIIs create and thrive in waves one can assume that India is presently among the chosen ones for special treatment by the foreign portfolio investors.   It then follows that a change in their strategy could halt or seriously dent the share price increase.