If the response to the National Thermal Power Corporation issue is anything to go by, India is still the flavour of the month for foreign institutional investors.

FIIs are understood to have put in bids worth over $8 billion though the quota for institutions was just about $450 million.

The move by qualified institutional buyers to put in large bids to grab as large an allocation as possible shows their serious interest in the issue. The interest, however, did not start with the NTPC offer though.

Between August and now, FIIs have bought $1.5 billion worth of equities, fuelling a 20 per cent rally in the markets, taking the Sensex from 5,200 to almost 5,800.

As Sanjiv Duggal, chief investment officer, HSBC asset management company, says, "Liquidity is driving the markets despite deteriorating fundamentals like soaring oil prices, lower GDP projections, and higher inflation and interest rates."

The rupee, too, seems to have reversed its weakening trend. It fell from around Rs 45.40 in June to hit a low of Rs 46.47 in July and then strengthened to Rs 46 in early August to around Rs 45.85 currently.

The inflows are expected to continue. According to S Narayan, managing director, Kotak Securities: "FIIs are still bullish on India, given the broad growth story is intact. The inflow may get disrupted only if oil crosses $60."

FII inflows in calendar year 2004 will cross last year's $6.5 billion and may settle at $7 billion-$7.5 billion, he says.

Agrees Devesh Kumar, head of equities at ICICI Securities, "Another $1.5 billion-$2 billion could come in by the year-end though, unfortunately, there are no big IPOs lined up."

Kumar asserts that FIIs continue to believe in the India story, adding that around 10-15 per cent of FII money in the last two months will be from newcomers in the bourses. Andrew Holland, executive vice-president (research) at DSP Merrill Lynch, concurs.

"With FIIs more comfortable with the new government and the capital expansion cycle turning positive, FIIs are confident that the corporate sector will deliver numbers so we may easily see FII inflows at the same levels as last year," he says.

Holland adds that next year the flows can be between $7 billion and $10 billion, especially if the Ashok Lahiri Committee recommendations on corporates not requiring to pass resolutions for changing FII limits is accepted. This can increase India's weight in the MSCI and mean larger inflows.

The story is not too different in the rest of the region. Ajay Srinivasan of Prudential Corporation Asia notes that with the return of inflation, real interest rates in many places are the lowest they have been for a long time, reversing a trend where investors are better off holding cash in a bank.

Nearly $5 trillion is held in bank accounts in Asia ex-Japan, a multiple of the free float in these stock markets. So, the wall of money that could be looking for assets that do well in inflationary situations could be high.

There is also the widely held view that regional currencies will strengthen. This will add to the flow of money into the region.

What does this liquidity mean for the Indian rupee? Manish Chokhani, director, Enam, observes that while the inflows will remain strong, the course of the rupee will be determined more by the Reserve Bank of India, even though it appears that it will strengthen vis-a-vis the dollar.

Since FIIs are unlikely to pull out of the Indian markets, even though the valuations might not be compelling, the rupee could move in a band with the central bank trying to keep the rupee strong enough so as to keep imports cheaper, and control inflation.

Holland observes that there will be a marginal impact on the rupee though FDI inflows will also play an important role.

Chokhani feels India simply does not have the market cap to support the kind of inflows that can actually come in.

"With a market cap of $250 billion, 80 per cent of which is accounted for by the top 50 stocks, we do not have room for even $50 billion unless there are new IPOs," he observes.