You may call this a materialistic world but you also have to accept the fact that money spins it around. Like air and water, money doesn't recognise any boundaries either. Globalisation has allowed free movement of capital, and capital chases economic growth.

India's economic growth records over 7% even today, is a rare phenomenon, considering that other major economies struggle to stay in the green. Naturally, India is the blue-eyed boy of Foreign Institutional Investors (FIIs) and they are the mainstay of Indian markets. The participation of Indian investors in their own market is abysmally low and makes the Indian markets vulnerable to sudden outflows of FIIs.

At present, the Indian markets look sluggish because movement of the leading indices is restricted to a narrow range. Valuations are expensive and rapid growth is out of sight. In such a scenario, FIIs might have even started exiting Indian markets inconspicuously. Should you follow suit?

Before you decide upon it, we first need to look at what the current trend of FII flows is.

FIIs—Catalyst to Market Movement

Year FII Inflows / Outflows in Indian Equity Markets (Rs in Crore) 2010 133,266 2011 -2,714 2012 128,360 2013 113,136 2014 97,054 2015# 24,888

#Year till date
Data as on October 19, 2015
(Source: NSDL, ACE MF, PersonalFN Research)

FIIs invest with expectations and when disappointed with the developments on field, they shun companies, sectors, and even markets. Need proof? Markets reached their lows in 2011. As depicted by the movement of S&P BSE Sensex, one of India's most widely tracked indices, markets kept rising thereafter. However, the incremental investments of FIIs continued to dip subsequently.

FIIs went gaga over Indian equities when valuations were low and there was hope that change in the then political scenario would help India speed up reforms, eventually resulting in higher economic growth. These were India specific factors whereas global factors such as loose monetary policies in developed markets and stunted growth in other major economies provided a helping hand to Indian markets.

Have FIIs stopped believing in Indian markets? Yes, for the time being.

Here are some of the possible reasons:

• Little has changed at ground-zero after the NDA Government has come to the power. Although the agenda of the Government is to expedite economic growth, there are many wrinkles to iron out.
• Industrial growth is still fragile as the capex cycle is yet to see a revival.
• Legislative reforms appear a distant dream as the NDA Government lacks members in Rajya Sabha
• Indian banks feel the pinch of the deteriorating quality of assets, and expect to slow down fresh disbursals of loans.
• Inflation expectation at the retail level still remains high despite of falling inflation.
• Demand in rural areas has been erratic due to vagaries of nature and its impact on agricultural output. Urban demand is affected by high inflation expectation
• Companies' earnings are not growing rapidly despite favourable factors such as low commodity prices and falling interest rates, to name a few.
• Uncertainties pertaining to the monetary policy actions of central banks in developing nations, especially in the U.S. have further discouraged FIIs to remain bullish on emerging markets including India.
  
  

Are we heading for an anticlimax?

When you row down the flowing stream, you may reach your destination faster. Sailing against the current means you will reach your destination late. Ideally, you should set your target first and then try to understand how the flow of water may affect your voyage.

Following FIIs is just like following the water current, it may take you to an undesired place. Avoid that. After all, they are fickle friends. They want profits not just a promise. Best to stay put as long as you know your objectives.

Unfortunately, Indian retail investors are making a comeback to the markets when FIIs are likely to exit India. Concentrating too much on the recent market movement could be myopic. When FIIs have started questioning the prospects of the Indian economy, many New Fund Offers (NFOs) from mutual funds in India have received overwhelming response.

Legendary investor Warren Buffet, in his letter to the Shareholders of Berkshire Hathaway Inc, back in 1990, wrote something interesting. Here's an excerpt of what he wrote...

“My most surprising discovery: the overwhelming importance in business of an unseen force that we might call "the institutional imperative." In business school, I was given no hint of the imperative's existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so. Instead, rationality frequently wilts when the institutional imperative comes into play.”

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