The Hindu Business Line : Volatile condition may prevail

For India, the year-end asset allocation decisions by the FIIs were more influenced by the apprehension that the returns have peaked and are likely to fall in the medium-term. It would be too early to assert that India, one of four emerging markets would fast lose out in terms of priority of the global funds.

FOREIGN institutional investors have pulled out nearly $5 billion from the emerging markets in the first fortnight of 2005. Indian equities, which have been attracting one of the highest attentions in November and December 2004, have witnessed net sell-off by FIIs in the past trading week.

The total net figure of pulled-out money from the cash market last week was Rs 373 crore. In the derivatives market, both in Nifty futures and in individual stock futures, FIIs broadly have gone short.

Since the release of the minutes of the meeting of the US Federal Reserves in mid-December underlining serious concern over inflation in US and the possibility of a significant rate hike had spooked the sentiment for the investors in the emerging market.

A strong dollar policy, which seems to gaining in currency, has also fuelled a funds pull-out.

But for India, the year-end asset allocation decisions by the FIIs were more influenced by the apprehension that the returns have peaked and are likely to fall in the medium-term.

It would be too early to assert that India, one of four emerging markets along with Brazil, Russia and China, would fast lose out in terms of priority of the global funds.

The US investors despite compulsions at home and lucrative possibilities last year did not invest more than 10 per cent of their portfolio in the emerging markets. Further, clarity in terms of the US economy is expected in the coming weeks. This would broadly determine the trend in international fund flow in the medium term.

In the interim, churning and tinkering with the weighting will control the reduced flow to the emerging markets.

For Dalal Street, this is an unexpected turn of events. Almost 25 per cent of gains made since May 2004 in the BSE Sensex has been wiped out in the last two weeks. Last week, the Sensex lost 3.84 per cent and the S&P CNX Nifty tumbled 4.19 per cent.

As the déjà vu set in, the broader indices also slipped. The S&P CNX 500 index witnessed a sharp fall 4.24 per cent.

In the immediate term, return of the robust November-December overseas flow is almost ruled out. This means, the bounce back in the Indian benchmark indices may not be pronounced this week.

The technical charts also support this view. The overall technical evidence indicates that the market may have already formed an intermediate or major top. The market is likely to remain volatile.

It would not be surprising if the market ignores better third quarter numbers. Another bout of serious correction may see a number of operators bleeding on the Street.

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