BSE | Nifty growth looks deceptive wrto FII's made

The Indian stock market has risen sharply on the back of renewed foreign inflows in recent weeks. The Sensex is up 45% compared to its level in both January and April. FII inflows, which were negative in 2008-09, have turned positive. In April and May, we had $5 billion of net FII inflows into the Indian stock market.

First, it would be unwise to make any linear extrapolation from the FII inflows seen so far. In 2008-09, foreign investors fled the Indian market just as they did other emerging markets. FII inflows in 2008-09 were minus $11 billion. This was a panic reaction to troubled conditions in the US and Europe. In such conditions, there is a ‘flight to safety’- investors tend to pull their money out of risky assets and park it in US treasuries.

Since 1991, only once before have we seen negative FII flows and that was in 1998-99 when FII flows were minus $390 million. At that time, the crisis was centred in East Asia. Now, it’s centred in the US, which is by far the biggest source of portfolio flows. That is why FII outflows in 2008-09 have been far larger than in the East-Asian crisis.

Investors see the global situation as stabilising although recovery will be a long drawn-out affair. They also think that some emerging markets, such as India and China, will do better than thought a few months ago. The withdrawal of FII funds from India last year caused valuations to drop to a level where entry became attractive. So, FII flows have returned with a bang.

But this does not mean that FII inflows will continue at anywhere near the same pace as in April-May. FII flows attained their peak of $20 billion in 2007-08 at the height of the global boom. The next highest level was $11 billion in 2003-04. It is unlikely that FII flows in the current year can match the 2007-08 level.

courtesy economictimes