Fed rate cut leads to $1.2 bn equity inflow

Foreign institutional investors pumped in a whopping $1.2 bn in the domestic equity markets in just three days following a US Federal Reserve rate cut of 50 basis points on Tuesday. According to secondary market data, FIIs bought shares worth Rs 4,847 crore (Rs 48.47 billion) in the past three days.

A day after Federal Reserve Chairman Ben Bernanke announced the rate cut, FIIs bought shares worth over Rs 2,400 crore (Rs 24 billion), lifting the index up by 650 points, one of its biggest intra-day gains. The massive inflow of foreign money has seen the markets soar by about 900 points to touch new highs

Analysts point out that foreign money is slowly returning to emerging markets with Goldman Sachs, Morgan Stanley and Nomura amongst the major buyers. Long-term funds such as Fidelity, HSBC and Deutsche Securities seem to be holding on to their portfolios in India.

Kashmira Mehta, institutional dealer, CD Equi Search, is of the view that the markets in the coming days would be powered by the flow of FII money. "Some of the hedge funds are aggressively buying in the markets. Even though the valuations look a bit stretched, liquidity would drive the markets further, and more overseas funds would flow as the markets seem to be strong fundamentally. Also, advance tax figures are an indication of good earnings in the second quarter," she said.

When the US subprime crisis raised its head FIIs were net sellers offloading Rs 12,338 crore (Rs 123.38 bn) in Indian equity, this month saw the trend reversed with FIIs becoming net buyers to the amount of Rs 8,440 crore (Rs 84.4 billion).

Contrary to this trend domestic institutions are on a selling spree. In the last three days, they sold over Rs 1,172 crore (Rs 11.72 billion) in the secondary market. In September, they have been net sellers to the tune of Rs 2,500 crore (Rs 25 billion).