The Hindu Business Line : Throttle continues to be in FIIs' hands

WHAT a year it was! For Dalal Street, it has been a year of records. Not only the key indices scaled new heights, but the foreign fund inflow has been unprecedented. The economy has seen lowest interest regime in decades and marked improvement in corporate performance fuelled a broad-based market rally.

But barely a fortnight before the year-end, a large section of investors is opting for caution.

In the last few weeks, there were definite indications that domestic liquidity was taking a backseat. FII money, on the contrary, flowed in steadily except for the previous week.

The net inflow from overseas fund last week increased to Rs 1,463.90 crore from the previous week figure of Rs 1,177.60 crore.

As of now, the movements on the key indices - the BSE Sensex and the S&P CNX Nifty - are largely influenced by the overseas flow. The domestic investors, on the other hand, are directing the broader indices.

Vertical limit: There is optimism in the air. But the domestic investors appear to be waiting for the defining moments of the corporate economy. The third and fourth quarter results are likely to be crucial for the investors for taking an overall valuation call.

The current rally from June onwards factored in improvement in the profits while the UPA Government nurtured an economic consolidation process. Although there was hardly any aggressive reforms call, the negative surprises were a few and far between.

The domestic players now expect the roadmap for reforms and resumption of PSU disinvestment process would provide a fresh valuation impetus for the stock market. But these measures may not come thick and fast.

A rehearsal for divestment may be unfolded in the coming two quarters of the current fiscal.

If one reads the signals right, the power sector may see the first step towards disinvestment by the UPA Government, beginning with Power Grid Corporation and Power Finance Corporation.

Before that a value unlocking exercise could be undertaken in oil PSUs.

This may also hasten the pace of flow of the domestic money-in-the-waiting to the equities.

Corporate monarchy: As an increasing number of equities reaching their highs, the valuation issue is quietly being linked to the perception of governance of the companies.

The quality of corporate democracy in the country has not been enviable. The transparency still remains in letters. Whistle blowing is unheard of. There are question marks on the role of independent directors.

There is also a growing feeling among the investors that the regulations for detecting and controlling insider trading be reviewed.

However, these concerns get muted when pressure of liquidity flow turns the tide.

This week, the market valuation is likely to dependent on net investment flow from the FIIs and the degree of profit taking by the domestic institutions.

Interestingly, domestic mutual funds were net buyers on two days in the last week, an exception after a while.

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