Value Line Advisors Pvt Ltd.(VLA) is an investment banking & merchant banking company registered with SEBI, running under the directorship of Mr. Sanjiv Chainani & Ms. Bela Desai

1. Column B u s i n e ss I n d i a u t h e m ag a z i n e o f t h e c o r p o r at e wo r l d
Dancing to FII flows
During the phases of strong FII inflows, markets perform well
L
iquidity drives markets, and the flow Anti-Avoidance Rules (gaar) and retrospec-
of funds drives liquidity. While it is tive taxation by ex-finance minister Pranab
important to have strong domestic Mukherjee, this has been the biggest damp-
participation, the money pumped in by for- ener of sentiments, resulting in fii outflows
eign institutional investors (fiis) adds fuel to the tune of `1,957 crore in the second
to recovery in the market. India opened quarter ended June 2012.
its stock market to fiis two decades back Enter into the third quarter of the year,
(September 1992) and since then, portfo- with the government’s softening stand over
lio investments from fiis are being channel- Sanjiv Chainani gaar and retrospective taxation issues, fii s
ised into the domestic equity market. There have turned positive with net investments of
have been some jerks – peak and fall in over `13,000 crore put back into the Indian
real numbers. stock market between July and August (till
Overall these fiis have gained a signif- 8 Aug). This is despite major concerns over
icant role in Indian stock markets. Volatil- the country’s fragile economy and drought-
ity in market indices is clearly influenced by like situation. Clearly drought doesn’t seem
fii flows. To prove this point, take the broad to be a matter of concern for them! fiis have
index – the nifty and its movement been investing aggressively in the
over the last decade – and plot it FII flows and Nifty returns Indian markets on the expectations
against the annual fii flow into the of announcement of concrete steps
Indian market (see chart). An anal- 150000 FII net equity Nifty returns
80 to fix fiscal deficit and positive pol-
investments (%)
ysis reveals that during the 10-year icy initiatives from the government
60
period, the nifty has danced to the 120000 during the ongoing Monsoon
tune of fii investments. They have 90000 40 Session of Parliament.
been in sync.
G
60000 20
The simple observation of the oing by the past, on various
data points tells us that during the 30000 0 occasions fiis have played an
phases of strong fii inflows between -20
important role in building up India’s
0
2003 and 2007 and between 2009 forex reserves which have enabled a
and 2010, markets had performed -30000 -40 host of economic reforms. They see a
extremely well. However, with the -60000 -60 country’s up-cycle much earlier than
reversal of money from fiis in the 2003 04 05 06 07 08 09 10 11 12* others. Once they come in, the sec-
years 2008 and 2011, markets had ondary market followed by the pri-
Figures are for calender year. *Till 8th August 2012
collapsed. This shows that the per- mary market picks up steam, money
formance of Indian equity markets is flows into growth companies and the
directly linked to fii flows. economy picks up.
Circa 2012. Since the beginning of the Such is their position that fiis are occupy-
year, fiis have been on a buying spree in ing an important seat in the country’s eco-
Indian equities. Despite global uncertainties nomic growth despite the current sluggish
and concerns over a slowing domestic econ- domestic sentiment. fiis strongly influence
omy, fiis have invested over `55,000 crore short-term market movements during bear
($11 billion) into Indian equities between markets. Even with strong fii flows, Indian
January and August 2012 (till 8 Aug). This markets are currently trading range-bound.
has resulted in a strong up-move in the mar- This is mainly due to continuous selling by
ket indices. nifty has moved-up strongly domestic institutions. It will be interesting to
from 4624 levels at the end of December see if fiis will continue to pump in money,
2011 to 5338 levels in August 2012, after given the bad shape of macro-fundamental
touching 52-week highs of 5607 levels in The author is factors. The historical trend and the high pos-
February 2012. managing director of itive correlation between fii flows and perfor-
fii s have invested over `43,900 crore into Value Line Advisors mance of the nifty provide hope that markets
Indian equity markets in the first quarter Pvt Ltd, a Category will eventually breakout on the upside. This
ended March 2012. Subsequently, with the 1 Merchant Banker can happen only if there are more positive
announcement of controversial General registered with sebi moves from the government’s side. u
u 112 u
S e p t e m b e r 2 , 2 01 2