The current market optimism centres around India presenting a growth opportunity in a dismal global landscape.

Foreign institutional investors (FII) have been remarkably bullish on India, supporting equity prices here even as domestic institutions and retail investors have chosen to sell. These investors have poured in some $13 billion into Indian stocks, pushing up the Sensex by almost a fifth so far this year and making it among the top performing global market benchmarks. This turnaround — in marked contrast to last year when the Sensex shed nearly a quarter — comes even as companies have seen a further slowdown in revenue growth and the pressure on their profits from high input and financing costs has intensified. The gyrations in the rupee, shaving off chunks from corporate bottomlines, have only worsened matters. Nor does economic data offer much comfort with inflation at stubbornly elevated levels, slowing industrial output and overall GDP growth, and widening external current account and fiscal deficits. If this entire gloomy prognosis on the state of the Indian economy and its companies has not deterred the FIIs from buying, it only points to a sense of optimism that somehow seems to be eluding other investors in the Indian market.

It can be said about FIIs, though, that they, unlike domestic investors, are guided more by relative valuations and growth performance across economies. True, the Indian economy grew by just 5.5 per cent in the last quarter. But then, not many others — barring China and a host of comparatively smaller economies – are currently growing at a faster pace. Added to this is the global liquidity unleashed by the recent bond-buying monetary stimulus plans announced by the US Federal Reserve and the European Central Bank. This money would obviously look for lucrative investment avenues. The fact that the Sensex is still trading at price earning multiples below the long-term average does offer buying opportunities for many stocks. And if last week’s slew of reform-oriented policy measures gives further hope to foreign investors — who have been most vocal about government inaction — it is only to be welcomed.

The Government would do well to build on this optimism, based on India presenting better growth possibilities in an otherwise dismal global landscape. It can certainly clear the air on the General Anti Avoidance Rules. FII inflows were negative in the months following its announcement in the Budget and picked up only when its implementation was delayed. The rules on funds coming in through off-shore tax havens and taxation of participatory notes need to be spelt out in such a manner that offers greater comfort to this class of investors. At least, till such time that current account deficit on external payment of the Indian economy stabilises. Also, adequate time should be given so that authentic investors coming through these routes can re-channel their flows. While there is need to discourage black-money flows that come dressed up as FII money into the country, uncertainties from constant policy flip-flops is something that is to be avoided. A vibrant market is ultimately beneficial to the economy, not the least for the Government’s divestment programme in public sector.

(This article was published on September 19, 2012)
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