Setting a record: FII inflow in October is third-best ever

MUMBAI: With the end of the current calendar year just two months away, foreign institutional investors (FIIs) seem to be in a hurry to match the record investments in Indian equities they made last year.

As per the Securities and Exchange Board of India (Sebi) data, FIIs have invested $1.74 billion (Rs 8,013.10 crore) in October this year, the third-highest monthly investment ever and the biggest this calendar year.

This massive inflow of foreign money takes the total FII investment in the current calendar year to $6.82 billion (Rs 3,11,50.90 crore), $3.88 billion (Rs 16,031 crore) short of the all-time high of $10.7 billion (Rs 4,71,81.90 crore) they made in the previous year.

But will this type of flow hold for the next two months?

The traditional theory that FIIs book profits in December to pay their hefty bonuses hasn’t held good in the past few years.

“In the last three years, I have not seen FIIs pulling out in December as they had in the past,” said Sanjay Sinha, head of equity at SBI Mutual Fund.

“One can only hazard a guess as to why flows from them have been exceptionally strong over the past month,” he said.

“The fact that there is a slowdown in the US economy could be one reason, with people preferring to park their money in countries where growth is far more certain,” he added.

Another factor that could have spurred the surge in FII inflows is the fresh number of FIIs registering with Sebi every day. Since January this year, there has been an addition of 150 more FIIs, and the aggregate now stands at 973. “For many of them, this is an absolutely new country to park their money,” added Sinha.

So, will this year that has seen records tumble one by one, see one more of the sort? Even the rarest of the chances says no. However, if past trends are anything to go by, there is a narrow possibility that the FIIs could end the year close, but no cigar.

Here are the numbers. For the scores to level, FIIs need to average $1.94 billion (Rs 8,015.15 crore) in net investments through the remaining two months of the calendar. Now, the average FII investments in the last two months of a calendar year have seen an increase of 98-163% from the first 10-month average, since 2002.

So far this year, FII investments have averaged $0.68 billion (Rs 3,115.09 crore). Hence, it looks highly improbable in a market that is rumoured to be overstretched, even if FII investments show an average increase of 163% during November and December.

If they show such an increase, foreign funds worth an average $1.79 billion per month ($0.68 billion X 2.63/100) will flow in during the next two months.

If that happens, total FII investments will hit $10.4 billion ($3.58 bn + $6.82 bn), close to last year’s record investment of $10.7 billion. Needless to say, the Sensex will be up there in the clouds if that happens.

However, market experts think it’s still a possibility.

“Pension funds have already been formed in the US and European countries. Though there has been no information on the magnitude of the funds, the amount is expected to be huge. They may flow in at anytime,” said Gaurang Shah, area manager of Geojit Financial Services.

Andrew Holland, executive vice president, DSP Merrill Lynch, echoed the view.

“India, because of its weightage in the international market, is cornering a fair share of fund inflows to emerging markets. Globally, the liquidity is still strong and hence the flow should continue.”

Even as the Sensex is currently valued at a relatively high price-to-earnings ratio of 21.37, analysts say the focus has shifted 2008 earnings, which are expected to be better. This makes the index cheaper.

“When the talk of overvaluation resurfaced, the market’s price-to-earnings was calculated with 2007 earnings. Now, the focus has entirely shifted to 2008 earnings and many expect it to be better. So there is a higher denominator effect there. Further, among the BRIC markets, Indian markets are the least susceptible to external factors,” Anand Shah, fund manager, Kotak Mutual Funds, said.

Let’s wait and watch.