Learn to accept pain from FIIs, say experts

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As long as FIIs have a major say in the Indian market, any adverse development in the global financial system will have a ripple effect here too, reports Bijith R

The credit crunch in the US economy as a result of the sub-prime mortgage crisis continues to haunt equity markets across the globe. First, it was the uncertainty surrounding the enormity of the crisis that led to a major sell-off across markets, regularly fuelled by news of liquidation of institutional fund houses which had a major exposure in the sub--prime market. Global markets still continue to reflect the developments in the US as clarity emerges, like the fact that the current crisis is not confined to a particular segment of the US economy. Now, it’s becoming clear that the crisis has spilled over to the broader economy and the facts and figures related to US retail sales, non-farm payrolls and employment data clearly point to the fact that the US is possibly heading towards a slowdown.

This is likely to effect the Indian equity market as well, for, though many argue that the Indian stock market is a symbol of India’s robust economic growth, India’s experience in the last one-and-a-half years has shown that the stock market has reacted to developments elsewhere in the world. In May 2006, when the US Federal Reserve decided to hike the interest rate, the Indian market witnessed a mass exodus by foreign institutional investors (FIIs), mainly hedge funds which had taken a highly leveraged position in the Indian equity market.

As a result, the 30-share Sensex of the Bombay Stock Exchange (BSE) fell by 3,687.94 points or 29.24% from a high of 12,612.38 points. Similarly in February 2007, Indian markets plunged sharply by 2,237.05 points or 15.26% from its life high of 14,652.09 points, as a result of unwinding of yen carry trade by global financial institutions when the Japanese yen appreciated sharply against the US dollar.

Currently, the market is experiencing a similar sharp fall in equity indices and a large bout of volatility, thanks to negative news flows emanating from the US economy. In August 2007, FIIs were net sellers of equity worth Rs 7,770.50 crore in the Indian market. During these period of crises, the domestic growth story remained intact with the Indian economy achieving a GDP growth of around 9% and India Inc. coming out with strong growth numbers.