The Hindu Business Line : FII inflows make a lukewarm start

INVESTMENTS by foreign institutional investors (FIIs) this year got off to a tepid start with inflows into the equities market totalling only Rs 190.9 crore. This is less than one-tenth the sum invested by FIIs during the first two weeks of the last calendar year.

In fact, 521 registered FIIs had invested Rs 2,141.5 crore till January 13, 2004. As against this, the Rs 190.9 crore investment this year has come from 643 FIIs that are registered with the Securities and Exchange Board of India.

India's loss in terms of FII inflows could prove to be Malaysia's gain, according to FII sources. In fact, when most emerging markets were on a downspin earlier this week, Malaysia's KLSE index touched its 56-month highs. The KLSE index is creeping towards the 1000-level.

FIIs say that they are closely watching the index and the inflows into this could affect the inflows into India in the short to medium term. "Though there are various factors at play here, in the short term some funds may go to these markets. One of the reasons for the spurt in interest in Malaysia is because of the tsunami. There would be infrastructure (that was destroyed by the tidal waves) rebuilding in this economy soon and that has led to some interest in certain sectors," said Mr Andrew Holland, Executive Vice-President, DSP Merrill Lynch.

FIIs are understood to be also actively shuffling their emerging markets portfolio. "India has given 56.2 per cent returns from its lowest point in May 2004. Our market has run up significantly. Foreign money tends to move to slightly under performing markets as prospects of returns there could be higher," said Mr Amitabh Chakraborty, Vice-President and Head Research, Kotak Securities.

The Malaysian index is expected to run up significantly in the short to medium term. Business Monitor International (BMI), in its Asia update, says that "we believe that the KLSE is poised for further gains to 1,000 in the first instance, and possibly even as high as 1,200 over the medium term."

The reasoning favouring Malaysia is that the country's macroeconomic fundamentals are robust, and look set to outperform regional competitors in 2005. "Interest rates should, meanwhile, remain low, and we believe that the ringgit peg will remain unchanged for the remainder of this year, which should ensure financial stability," BMI said.

Analysts also expect the Malaysian Government to speed up the reform process in the country.

The increased interest of FIIs in Malaysia comes at a time when the Indian markets have turned extremely choppy. Though analysts predict that the long term concerns on FII inflows centre around the strengthening of the dollar, the effect of Malaysia in the short to medium term cannot be overlooked. "Dollars could start flowing into Malaysia initially for the short term, but the strengthening of the dollar coupled with the way our markets are behaving currently, could lead to it finding a more promising market there for the longer term as well," said an FII analyst.

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