FI investments to insulate markets against FII impact

Written by Markets Bureau | Kolkata | Updated: Jan 23 2009, 05:42am hrs
The impact of foreign institutional investments on Indian markets is expected to diminish in coming years, according to Bombay Stock Exchange chairman Jagdish Capoor. FII holdings in Indian markets came down to $88 billion in December 2008 from a high of $259 billion in January.

According to Capoor, the impact of foreign institutional investments on Indian markets is expected to diminish with domestic institution flows expected to remain strong and insurance inflows becoming increasingly important.

FII inflows played a significant role in driving the bull market of the last four years. The fall in the Sensex that we have seen is directly related to the withdrawal of FII funds, he said. While some of the decline is on account of a fall in valuations, a large part is due to disinvestments by foreign institutions, he added.

Capoor, present at an interactive session organised by the Indian Chamber of Commerce, said the markets are down on account of lower demand and decreased liquidity, particularly global. There are reasons to believe that India will reclaim the high growth trajectory in the medium to long term. Our markets are down not because of any intrinsic flaw in the business models of our companies.

Meanwhile, cash as a percentage of total assets under management was just above 6% in January 2008 and rose to 18% in November. Once the situation stabilises, mutual funds will deploy this cash in the equity market. This would definitely have an impact on market sentiment.

The price earning ratio of the Sensex is at 12x now, the lowest in twenty years. Similarly, the price/book value ratio is at 2.5x, the lowest in a decade. The dividend yield of the sensex is at 1.9%, against an all-time high of 2.6. From the valuations perspective, the markets are looking attractive for medium to long-term investment, Capoor said.