FIIs are back in India with a bang. After a lackluster performance in 2000 where their net portfolio investment in the country's domestic market was a meager $555 mn, this year they have pumped in over $3.5bn with about 72% going into equities. A robust economy, cheaper valuations, and strong rupee are some of the major catalysts driving the FII investment in the country. However, after a long-drawn rally which stretches over a period of five months now, the billion dollar question that emerges is - whether this inflow is sustainable and if yes, for how long?
What is driving FII investments in India? A slew of factors such as robust economic growth, an appreciating rupee, strong forex reserves, a healthy performance by the domestic corporate sector, good monsoon, and cheaper valuations add to the attractiveness of the country as an investment destination. This is vindicated by the views expressed by several FIIs, including the likes of Merrill Lynch, Hansberger, Oppenheimer, CLSA, and Schröder, as well as research firms. In fact, a recent report by the US-based Institute of International Finance further puts the things in perspective. It says that though till date India has lagged behind the Morgan Stanley Capital International (MSCI) Emerging Market Asia Index (11% vs. 0.94%), the macro and the micro pictures indicate that foreign investors have a reason to look at India favorably. With the factors like India being the fastest growing economy in the world, attractive valuations compared to other emerging markets (2003 forward P/E at 8.6 compared to 12.6 for Asia Pacific), and the government's ongoing divestment program make India an attractive destination, the report adds further.
However, India faces stiff competition from other emerging markets like China, Taiwan, Korea, not to mention Pakistan and Sri Lanka, which have outperformed India significantly (see table: Emerging Markets - Which is the Most Attractive of Them All?). Against this backdrop, would it be possible for the Indian stock market to sustain the inflow? Besides concerns over tension across the border, the ensuing general elections in 2004, rising fiscal deficit, and recovery in developed markets like America and Japan, which could see diversion of funds to these economies, could prove as major deterrents.
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