The Hindu Business Line : FIIs stay bullish on Indian market

Foreign institutional investor (FII) inflows into the equity market would continue as there are expectations that the Government would take up tax reforms during the Union Budget for the next fiscal.

Higher capital expenditure, lowering of capital gains taxes, increase in weightage of India in Morgan Stanley Capital International (MSCI) index and the appreciating rupee against the US dollar were other factors that would propel foreign investors to continue buying.

According to investment banking firm Merrill Lynch, "We are headed for another phase of strong investment spend led not only by corporate capex but also a surge in infrastructure spend. We estimate total investments to rise sharply from $120 billion in financial 2004 to $208 billion in 2007, led by a sharp jump in infrastructure spending, especially in power and oil exploration."

Another investment banking firm, JP Morgan, said there is huge inflow of foreign funds due to lower of capital gains tax in the last Budget.

"India is the only emerging market that imposes a capital gains tax on foreign institutional investors. In the latest budget, short-term capital gain tax was reduced to 10 per cent from 30 per cent and long-term capital gain tax was brought down to zero. The result is that more funds are investing directly in India," it said.

There is huge inflow of foreign money onto Indian bourses. Until now, $7.3 billion have been invested.

All-time high levels: Says Mr Paul D. Hedges, Global Head, Securities Services, Standard Chartered Bank, UK, "FII investment has reached all-time high levels and inflows are likely to continue."

FII inflow into equity markets is likely to continue next year due to increased free float for most of the listed companies.

Merrill Lynch said the restrictions on the FII ownership limits have curtailed India's index weights.

But next year it can increase by 20 to 30 per cent easing worries of India being an overweight market.

It said four of the top 10 market capitalisation companies - Bharti Televentures, IOC, NTPC and SAIL - are not part of the MSCI India due to their low floats.

"Given the likely floats (fresh issues and divestments) from them, we could see India's weight in the MSCI increasing by 10 per cent if they are included."

Moreover, the Ashok Lahiri committee has recommended major changes to the FII rules that could potentially increase India's weight in the MSCI indices by 20-30 per cent, feels Merrill Lynch.

Hedge funds: A top official of a foreign broking firm said that hedge funds are not investing directly in India.

Once SEBI allows them to do so, there would be huge inflow of funds from them, he said.

Hedge funds have seen spurt in assets under their management since 2000. According to Ms Joanne Murphy, Head of Sales (Asia Pacific), Alternate Fund Services, HSBC Securities Services, funds managed by hedge funds worldwide has increased from $8 billion in 2000 to $31 billion in 2001, $50 billion in 2002 and to $60 billion by 2003.

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