So, just when all looked gung-ho for Indian equity markets, several concerns seemed to have popped up. From a global perspective, concerns over Chinas move to curb lending coupled with the proposal of the US government to restrict banks proprietary trading operations and investment in hedge funds and private equity, have impacted the movement of equity markets in Asia. The rub-off effect was felt in India as well.
Then there were concerns over the high run-up on the valuations. These valuations had run-up expecting strong results from the Indian corporate sector and the results have been mixed, and certainly not in line with the high expectations that were built up.
Also, with inflation rising to uncomfortable levels, there is now an expectation that rates would be hiked and, therefore, take a toll on profitability in the coming days. The last eight times the wholesale price index climbed above their long-term average, the Sensex posted average losses of 5.6%, says a study carried out by Bloomberg.
In the year 2009, FIIs were net investors to the tune of over $17.17 billion, which was the highest inflow in a single year. The speed of inflows from FIIs went up sharply after the results of the general elections were announced in mid-May 2009, with investors reassured by a strong coalition government at the Centre that could take forward the reform process.
Not only the FIIs but also domestic insurance firms had been the biggest buyers of Indian equities in 2009, with retail investors not really having invested much in the equity market. Even now, domestic institutional investors have made up for some of the slack created by the exit of FIIs. The slide may otherwise have been sharper.