Since 2008 collapses of the Indian Sensex Index, dropping from nearly 21000 to 8000 has recouped all its losses and is currently trading around 21000. Who is responsible for this recovery and how did it take place?
There are 3 basic groups of investors in the Indian stock market namely the Retail investor, the Domestic Institutional investor and the foreign institutional investor.
In 2008 there were nearly 1.5 crore Indian retail investors. 2008 drop in sensex shook them out of the comfort zone. Many took huge losses as they thought that the market would bounce back in the short time. This didn’t materialize and nearly one third of them exited the market.
The domestic institutional investors are counting on the gross domestic savings to find its way to the stock market. Pension funds have been literally forced to invest in the stock market. Savings rate depends upon the Indian economic growth which is facing some challenges now. It is only up to the FIIs who should keep the investments flowing to keep the index moving higher. In fact they have done in the past. For the four years ended in 2013, foreign investors have put in Rs. 3.71342 lakh crores (trillion). This is more than the combined investment in the nine years beginning 2001.
What does the FIIs to invest such large amounts in the equity market? Several questions are asked which are
(1) Is it due to rapid economic growth in India?
Answer: Not really. The growth rate after 2009 hardly ever reached the 8 percent annual growth rate which was the case earlier
(2) Is it due to increase in global liquidity?
Answer: A resounding yes. Ben Bernanke has fixed the discount rate at an unbelievable 1 percent in the US. This he did to help lower employment rate especially when inflation rate was not going up.
A big chunk of the money thus created have found its way to the Indian market. It was easy for the FIIs because they were picking up good scripts for a song.
(3) Will this continue in the future?
Answer: The dollar inflow not only lifted indices but also resulted in the highest ever FII ownership. FIIs have selected some counters where they have ploughed their funds. Axis bank, Mand M, HCL technologies, Tata Power Company, NTPC, Wipro, Sun pharma to name a few with good election results and confidence in the Indian economy this trend may continue.
(4) What can stop this momentum?
a) Tapering of QE3: This will reduce liquidity and could cause the market to fall
b) Economic slowdown: If the Indian economy falters with growth rate falling below 5%, it will impact the corporate earnings and hence the possibility of the market going down
c) Interest rate going up. The RBI has kept the interest rate low to help the economy to recover. If the rate of inflation continues to go up, they may not have much choice except to push the interest rate
d) Sentiments: The Indian bond rating which is currently at BBB– could be lowered to BB+, a junk bond status. This will definitely hurt the stock market
(5) Upper limits on FII ownership
FIIs currently own substantial amount of stakes in leading banks and companies HDFC (73%), Infosys (55%), ICICI (67%). If their future purchases get tapered of the Sensex index will possibly stagnate.
Finally as an investment advice do what the FIIs do and never do what the retail investors do. The FIIs come in at the right time ride the wave then exit at the appropriate time. They bring in huge money and are supported by the availability of timely information. Retail investors are always too late to act. It is said that 80% of the retail investors loose money in the market. Good luck to the brave souls.