Learn to accept pain from FIIs, say experts

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Strict debt fund rules on anvilFIIs sell shares worth Rs 910 cr

: market participants are slowly coming to terms with the harsh reality that Indian capital markets can no longer rely only on the India growth story, but will have to learn to live with global macro-economic developments that could temporarily offset strong domestic fundamentals. Marketmen feel that with the present crisis impacting global liquidity, the risk perception of global investors has also changed and that they are finding comfort in parking their money in safer assets like government bonds and treasury bills. As a result, emerging equity markets, which are considered to be more risky compared to developed markets, may not be able to attract huge investment, at least for another six to seven months.

According to Apurva Shah, head of research, Prabhudas Lilladher: “There is no doubt that the stock market's basic strength lies in the strong India growth story.

But on the other hand, the market is heavily dependent on capital coming from different parts of the world that provide immense liquidity to the system. When any development directly impacts these players negatively, the Indian market is bound to get affected. If we can enjoy the benefit of an upward rally, the main drivers behind them being foreign players, we should also learn to take some pain on the downside when they book profits and make an exit.”

But the biggest question is whether domestic capital can play a more pro-active role in the Indian capital market to counter a sudden sell-off by foreign institutions and prevent potential damage to the financial system. The capital markets have already experienced sharp fluctuation in currency movement during this current crisis which could prove to be serious as was the case during the South East Asian economic crisis in the late nineties resulting from excessive outflow of portfolio money.

In August, when India witnessed a major sell-off by foreign players, domestic mutual funds bought equity worth Rs 4,093.90 crore in the market, thus providing some support at lower levels.

Sanjay Sinha, CIO, SBI Mutual Fund, said: “Domestic Institutional Investors constitute only10% of the ownership equity while FIIs’ ownership equity in the Indian market is around 22% which shows that the market is more tilted towards them. But on the positive side, in the last two years whenever the Indian mutual fund industry has turned net buyers after heavy selling by FIIs , we have witnessed a trend reversal in the Indian stock market.”