FIIs return in a big way on reform hope

Signals for a softer GAAR also helps foreign investors have poured about $2 billion into the domestic market since July

Foreign institutional investors (FIIs) seem unperturbed by the weak macroeconomic fundamentals and below-normal rainfall, going by their investments in Indian stocks in the past month.

Since July, foreign investors have poured in about $2 billion into the domestic market, more than in any other emerging market. This is despite downward revision of India's growth target and companies posting muted earnings growth in the first quarter of 2012-13.

Experts say despite all the negatives, portfolio flows have been healthy as India’s prospects are much better than any other emerging market. “India is the only emerging market that offers a viable growth story and attractive valuations,” said Saurabh Mukherjea, head of equities of Ambit Capital. “Every other emerging market is seeing a much sharper slowdown in growth.”

Also, with the government signalling it would go soft on the controversial General Anti-Avoidance Rules (GAAR) and retrospective taxation issues, some FIIs which had become wary have begun participating again, they added.

This reflects in the data on participatory notes (P-notes). After a record low in May, FII exposure to Indian stocks through the P-note route rose in June for the first time in four months. P-note exposure of FIIs rose by Rs 4,051 crore to Rs 69,523 crore. The total of P-notes value in equities and debt had plunged to 6.3 per cent (Rs 65,472 crore) in May, sharply down from 7.9 per cent of total FII exposure in the previous month.

“Robust inflows have come into the market, based on hopes that there will be some policy action. Globally, there are expectations that some liquidity will get injected by the central banks in Europe and the US,” said U R Bhat, MD, Dalton Capital Advisors.

Between April and mid-May, FIIs had pulled out nearly $1 billion from the Indian market, amid uncertainty surrounding the new tax regime. However, with Prime Minister Manmohan Singh deciding on a relook on GAAR and signalling a softer stance, FII worries seem to have got assuaged.

In what could soothe FII nerves further, new Finance Minister

P Chidambaram on Monday tried to bring clarity to tax laws. “Since investment is an act of faith, we must remove any apprehension or distrust in the minds of investors,” he told the media after becoming the finance minister.