Fiis May Not Participate In Derivatives Market: Expert

Outlook for the Indian equity markets remained strong, despite some temporary transition blues in the period after July 2 when the bourses migrate from the carryforward system to an options and futures market.

Speaking at a seminar organised by the Indo-American Society on 'Upcoming changes in India's capital markets-FII and local perspectives', Brian Brown, chief of Solomon Smith Barney, said foreign institutional inflows next year are seen in the $1-1.5 billion range, as against an expected $2.5 billion in the current year.

The worst is probably over in the domestic equity markets, Brown said, noting that the "markets have no way to go but look up (from here)".

Liquidity in the domestic markets is already down 80 per cent from the levels a year ago, Brown said. "I don't think markets can go any lower. What had to happen has already happened," he said.

Abhay Aima, global head of equities at HDFC Bank, said at the seminar that though the markets will be less liquid in the short period after the transition, both traded volumes and market sentiment will improve in the medium-term.

"Sure there will be a change in the trading philosophy and a shift in the power equations (among players in the market), the overall effect on the markets will be positive," Aima said.

Unit Trust of India (UTI) has been a big seller in the markets in recent periods to raise cash to meet redemption pressure, Brown said, but "going forward from here, I see only residual selling from UTI." Speculators will look to get back into the markets, and foreign institutional investors (FII) will remain net buyers, he said.

The only negative factor was the recast in the Morgan Stanley Composite Index, effective in two tranches beginning late this year, Brown noted.

The revised methodology of the index stresses more on free-float equity and ease of international investors in getting hold of the stock.

"But if more Indian companies move to increase FII holding limit to 49 per cent, perhaps the damage will be minimised. It can be contained to within 10 per cent of the total foreign equity inflows," Brown said.