Markets could stumble if govt turns complacent

Returns turn negative as FIIs turn sellers of equities in October

Foreign institutional investors (FIIs) remain bullish on India but are not now rushing to buy stocks. In October, they have turned net sellers of equities. After the pre-election euphoria, both portfolio investments and monthly market returns have cooled. And, the government's reforms process has stalled, thanks to elections in Haryana and Maharashtra, which has also impacted investor sentiment.

Over the past two months, the BSE Sensex has given negative returns (of 0.03 per cent in September and 1.03 per cent in October) and analysts expect markets to remain range-bound in the next couple of months. One may say after rising 26 per cent through the year, the Sensex is taking a breather. Capital flows have also slowed since August. In October, foreign capital flows into equities turned negative, with FIIs selling equities worth $200 million.

While global factors have contributed to the volatility in Indian markets, the slow pace of reforms since May has also led to disenchantment. Morgan Stanley in its India Next Series says the country could stumble and follow the same script as some others "if inaction, complacency or even just administrative roadblocks set in. Strong capital inflows that have followed the India reform story, just as they did for the rest of the reform club, could then slow, leading to the kind of volatility we have seen in the markets in Japan, China and Mexico".

Clearly, the government's pace on reforms will determine sustainability of investor interest. In the past four months, Antique Stock Broking says, markets have been in a trading zone, with Sensex returns gradually declining to 4.9 per cent, 1.9 per cent, 2.9 per cent and a negative 0.2 per cent in June, July, August, and September, respectively. There is a shift in terms of sectoral preferences, too, with defensives outperforming for the past few months, as investors await the new government's response to policy making, the brokerage adds.

Interestingly, the foreign capital flows into equities have remained lower than in the previous two years. FIIs invested $24.5 billion in Indian equities in 2012, $18.6 billion in 2013 and $13.6 billion in 2014 so far. It's apparent investors are looking for further action on reforms from the Narendra Modi-led government.