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When cash is king, FIIs rule the roost

Sangita Shah

With cash emerging as king, and the Securities and Exchanges Board of India hell-bent on driving out traces of speculative interest, foreign institutional investors-the only guys with ready cash-have emerged as the most dominant force in the Indian markets.

The FIIs' share in turnover in the domestic markets has jumped 550 per cent between January 2001 till June 25. The share of FII-originated trades in the cumulative turnover of BSE and NSE has shot up from a meagre 4 per cent in January 2001 to a whopping 22 per cent as of June 25.

The major reason, it turns out, is not that FIIs have become more active. It is because delivery-based trading is gaining momentum.

FIIs' share in the total turnover is shooting up because they do not enjoy the benefit of carrying forward their trades and speculate with the help of deferral products. And now given the equal footing, FIIs' share in the pure cash market is set to rise even further, a foreign fund manager says.

Dealers at a foreign brokerage said FII activity is perceptibly higher as they are lapping up technology shares at throwaway prices (compared to the high prices a year ago). So while domestic investors are spooked with all this talk of the IT slowdown, FIIs are eyeing India as a hedge against the US slowdown and are likely to increase the flow of funds to balance out their investment losses in the US, the dealer added.

"A lot of funds invested in India find it a defensive market and perceive it as a hedge to the US slowdown," Nilesh Shah, chief investment officer, Templeton Mutual Fund, says.

There are a few reasons for the attraction to India as a hedge against the US slowdown. There are only two countries in the world with growth rates over 6 per cent-and India is just next to China. Moreover, in contrast to the US slowdown, European markets are gearing up to increase IT spending and India technology companies stand to balance out their lost business in the US, a fund manager said.

The second reason, ironically, in India's favour is that the rupee is not convertible on capital account, unlike other Asian currencies where a sudden flight of capital had caused the economies to crash.

"India is a much safer destination as an economy because the currency in not fully convertible. This not only reduces the risk of flight of capital from the country, it also cushions India from the jitters of market and currency crashes abroad," Jignesh Shah, strategist, ASK-RJ Investment Management says.

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