Investors may increase their equity allocation gradually

Foreign Institutional Investors (FIIs) have been sticking to the Indian stock market with record inflows this year. The net inflow from them has been more than $23 billion in calendar year 2012. We should also note that this is after a net outflow in the year 2011. This makes it the second highest net inflow in any calendar year. The highest being 2010, when they pumped in around $29 billion in Indian equities. This makes the cumulative investments in India’s equity market around $125 billion which is at an all time high.

But, the domestic investors seemed to be more interested in less risky investment options like debt. In other words, domestic investors may have been underweight in their equity allocations and may have increased their allocation in the fixed income assets in 2012. But 2013 could be a different story. With expectations of rate cuts, the renewed thrust in policy reforms and the likely uptick in industrial activity; the domestic investors are more likely to increase their allocation towards equity assets.

However, this may not curb the appetite for fixed income investors significantly. The gradual easing cycle has actually spelt good news for fixed income investors. The 10 year G-Sec has seen its yield falling from 8.4% in Jan 2012 to around 8.11% in Dec 2012.

As far as the key interest rates are concerned they have remained largely stable throughout 2012, though the outlook

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