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It is common knowledge that foreign institutional investors (FIIs) pumped in copious amount of funds in to the equity market in 2010, helping the benchmark Sensex move close to its previous life-time high. But these inflows could be much stronger than what is commonly believed.
According to the International Investment Position (IIP) report published by RBI, FIIs brought in $37 billion in the first nine months of 2010. Data disseminated by SEBI show that FIIs invested only $18.4 billion in equity in this period.
The numbers published by SEBI are collated from the data submitted by the FII custodians on their primary and secondary market transactions. The lacuna in this data is that it captures FII transactions only when stocks are bought and sold, not when funds enter or leave the country. FII transactions in the derivative segment are also outside the ambit of this data.
On the other hand, the IIP report captures FII investments when funds flow in to the country and are parked with the FII custodians. These funds are used for derivative and cash market transactions.
According to the latest IIP report, there was a deluge of FII inflows in the quarter ended September 2010.
FIIs brought in $23.8 billion in this period. The corresponding figure according to SEBI is $11.1 billion.
It can therefore be inferred from the IIP report that FIIs brought in funds between July and September that were not immediately invested.
The mammoth initial public offering of Coal India that attracted FII subscription of almost $27 billion was open in the third week of October.
It is possible that overseas investors moved money in ahead of the issue.
The movement of the Indian rupee in September also reflects the overwhelming quantity of money that flowed in to the country in this month. The India currency rallied 5 per cent this month, moving from 47 to 44.5 against the dollar.
It may also be recalled that the mood towards Indian equity market turned overtly bullish in September. The benchmark Sensex rallied 11 per cent and went on to conquer the milestones at 19,000 and 20,000 in this month.
Announcement of another round of quantitative easing (QE2) in the US also coincides with the high inflows in to our country.
Expectation of further depreciation in the dollar following QE2 made fund flows in to emerging market equity accelerate. India could have received funds through this channel.
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