Analysts including FIIs are bullish on long term prospects

Foreign institutional investors (FII) are a significant segment of investors in the domestic markets. They have been gradually increasing their investments in the domestic markets since 2003, the beginning of the bull run. The Sensex went up from around the 3,000 levels to the 21,000 levels in a span of five years. The trend reversed from January this year as FIIs sold more than $6 billion worth of domestic stocks. 

It is clearly visible in the more than 30 percent drop in the Sensex and Nifty from January this year. On the other hand, registrations by FIIs seeking entry into the domestic markets have gone up and market data shows that FIIs are patiently waiting for the right opportunities to enter into promising mid-cap and small-cap stocks. 


Here are some factors that are keeping FIIs away: 

Inflation 


The inflation rate has gone out of control and is quoting above 12 percent over the last five weeks. It has touched the highest mark in the last 10 years. The Reserve Bank of India (RBI) has already taken many tough monetary policy measures - increasing both the repo rate as well as the cash reserve ratio - to curb inflation. The RBI and the government are expected to take more tough measures as inflation is still ruling quite high. 

Tough measures 


These strict monetary policy measures have had a significant impact on borrowing funds. This increase in interest rates has increased the cost of capital for corporates , and hence, hamper the growth rate of the corporate sector. This reduced corporate growth has started having an impact with a slower economic activity in the country. This is evident in the first quarter GDP growth rate which was recorded at 7.9 percent - the slowest in last 10 quarters. 

Effect on currency 


The slow growth rate and high crude oil price have an effect on the currency in the international markets. The rupee that appreciated 12 percent last year started feeling some pressure from the beginning of this year. It depreciated over 10 percent from April this year and is currently quoting at around 44 rupees a US dollar. 

Commodity prices 


On the global front, commodity prices have increased significantly over the last few months. Crude oil prices went up to 148 dollars per barrel, but recently have come down to around 110 dollars per barrel, after the news reports of a slowdown in demand for crude oil. 

Also, large global funds have seen a slump in their net inflows and also many large fund houses have lost a lot of money directly or indirectly in the US sub-prime crisis. This has forced them to pull their investments out from emerging markets. 

After the crash seen in many global markets this year, valuations in many developed markets are looking attractive. Many large fund managers are moving their funds to developed markets which have more depth and lower volatility as compared to emerging markets. 

Many analysts of large global funds are of the view that the volatility in the short term will continue. But most of them are bullish on the long-term prospects here. Many large fund managers believe that the domestic economy will grow consistently at over six percent in the next 10 years. This is quite attractive when compared with the 2-3 percent growth in developed economies. The domestic stock markets will bounce back once investor sentiments turn positive globally.