Monsoon might be weak this season but there is a flood of foreign capital in Indian equity markets this year. In the year 2014, markets have touched all-time high. S&P BSE Sensex crossed 26,000 in pre-budget sessions, before profit taking brought the index down. Nonetheless, S&P BSE Sensex regained the 26,000 level recently.

FIIs driven market rally

Data as on July 21, 2014
(Source: ACE MF, PersonalFN Research)

Foreign Institutional Investors (FIIs) have remained upbeat on India from the beginning of this year. They have invested about Rs 71,000 crore in 2014 so far. Foreign investors have gone gung-ho on India expecting that NDA Government will introduce and implement reformist policies. Till a fortnight ago it seemed like draught woes may impact market sentiment and FII flows may be interrupted. However, strong revival of monsoon in many parts of India has brought down rain deficit to 27% (according to the Indian Meteorological Department). Rain deficit in June was as high as 41%. This has resulted in improved market sentiment. FII flows have been strong even post budget. Many of you may be wondering how long FIIs will keep buying Indian equities and which way the market would pave path going forward..

So, will FIIs stay with India?
Well, foreign investors are look at India as an attractive investment destination amongst the developing economies. So India has it share in the FII cash pie. At present they are evincing much hope on the Modi-led-NDA Government to reinvigorate economic growth and revolutionise governance.

The much awaited budget of the Modi-led-NDA Government was recently announced. The budget 2014-15 has stated that there won't be any ambiguity on taxing foreign investors. Moreover, allowing 49% FDI in defence and insurance is believed to be a positive step in attracting foreign capital in capital intensive and strategically important sectors.

The Government also seems committed to walk tight on the path of fiscal consolidation. Thus in its endeavour to do so, they have envisaged a heavy disinvestment programme which could in favour. It is estimated that, Indian Government can potentially raise in excess of Rs 60,000 crore through sale of shares owned by the Government. Moreover, it is believed that the Government may give a big push to asset creation and infrastructure development. It is also expected to implement centrally funded schemes in more focused manner. The finance minister has suggested that the Government will bring in reforms in fuel subsidies. If all these steps actually materialise, FIIs may continue to give thumbs up to Indian equity markets. Having said this they will be watchful of inflation numbers.

You see, at present the risk appetite is high globally and there are enough triggers to drive domestic markets up in India; which may lead FIIs to exude confidence further in India. But the Government needs to take a call and emanate clarity on General Anti-Avoidance (GAAR) (which is supposedly to come to effect from April 1, 2015) because ambiguity on the same may upset the investment sentiment in the country.

Some technical aspects...
Apart from fundamental factors mentioned above, there are some technical factors that may affect FII flows. Every listed company has a restriction on foreign ownership in the company. In other words, there is an upper limit on how much stake can be bought by foreign investors. As stated in Business Standard dated July 23, 2014, foreign ownership has already utilised about 60% of the permissible limit. Furthermore, sectors which may benefit by economic reforms have already seen heavy FII flows. As per data published in Business Standard dated July 23, 2014, foreign ownership has touched 2/3rd of permissible limit in sectors such as consumer discretionary, financials and industrials leaving little room for aggressive FII buying.

So, will there be any correction?

At present, valuations are expensive. Some companies have reported their Q1FY15 results and others are expected. But earnings have been mixed thus far. You see, the earning needs to reflect on the market level, which doesn't seem the case so far. The Indian equity markets are continuing their hope rally expecting 'acche din', but the Government now has to deliver. So in such a scenario, it would not be prudent pay much heed to market index level. Rather, it would be wise to tread cautiously as valuations appear expensive. So going bullish on markets may prove to be risky, if corporate earnings do not meet market expectations. Timing the market looking at index level, would be speculating. Likewise following the FII trend may not mean much for you, while the going is good thus far.

PersonalFN is of the view that speculating can be hazardous to your wealth and health. Remember, a trader is good only until his last trade. Thus while investing you ought to adopt discipline, study fundamentals, recognise your risk appetite and stick to the asset allocation meant for you in your path to wealth creation. PersonalFN shares with its readers and investors some wealth creation ideas through various research services and other initiatives.

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