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R. Yegya Narayanan

Coimbatore, Dec. 26 As a tumultuous year draws to a close, the stock market in India is eagerly waiting for the policy direction that the new US President would give to the financial sector in his country, which would have a deep impact on the funds flow into emerging markets.

There are also questions about who would fill the vacuum created by the exiting FIIs and if the domestic investors would pump in enough money to lend stability to the market.

The expectation is that any future growth in the market would be driven by strong economic factors rather than excess liquidity.

Mr Satish Menon, Director (Operations), Geojit Financial Services Ltd, said till end-2007, the FIIs had brought in $66 billion (Rs 283,000 crore). Till November 2008, they withdrew $13.6 billion (Rs 54,700 crore).

He said the other classes of investors such as domestic MFs and insurance companies have not been able to counter this exodus as they suffered from high redemptions and lack of fresh funds flow into equity MFs/ULIPs. He said between January and November 2008, the net investment of MFs into equities was only Rs 11,000 crore whereas their net investment in debt was three-fold at Rs 33,000 crore, reflecting the investors’ mandate to be risk averse and to protect their capital.

Mr Menon said going ahead, the Government PF and private pension fund monies could flow into equity market.

There were also reports of Government making equity returns of private provident funds and superannuation funds tax free, which would facilitate decent inflows into equities.

Apart from LIC, which has a huge war chest, foreign pension funds also might find investing in Indian equity markets more rewarding.

As these institutional investors have a long-term approach to investment (as opposed to short-term approach of hedge funds that called the shots in pre-2007 market rally), it is felt that these more matured, serious long-term and responsible players would lend the much-needed stability to the market, he said.

On whether he foresaw any fundamental shift in the future US FII funds flow into India, he said money would “automatically find its true value across borders”.

First it will find a “suitable rate of return expected from investments and then channelise the money into such investments”.

If it was felt that the valuations in India are cheap and the growth prospects and the risk reward ratio are better here than many of the other countries, money will be forced to come here in the long run.

Asked whether the attitude of Indian companies eager to hike the FII investment limit was because they felt such investment would improve the perception about the investment quality would change, he said: “I don’t think the perception will change much, but now maybe the fundamentally strong stocks will have more takers.”

On what impact the demise of some US investment institutions and merger with/conversion into banks by some others would have on Indian equity market, Mr Menon said “Money would be scarce for some time and yes, it would be difficult for the short-term.”

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