What the current market rally is all about

Janaki Krishnan/NetScribes

After two long, miserable months, the equity markets are beginning to look up and, assuming nothing untoward occurs this week, August will see both, foreign institutional investors and mutual funds closing out with a net positive inflow in the market.

This month, the FIIs have bought equities to the tune of Rs 44.29 billion and sold stocks worth Rs 28.57 billion, a healthy surplus of Rs 15.72 billion. Mutual funds, encouraged by the re-entry of the foreign investors, have also stepped up purchases. Net purchases by mutual funds stand at Rs 1.34 billion as on Thursday, August 24.

But whether the buoyancy will be sustained is something that nobody is prepared to predict. In fact, there is nothing coincidental about the way that the two major investor categories have suddenly stepped up their investments in equities. It is all a deliberate maneuver -- with mutual fund managers asking the FIIs and bull operators to bail them out of a ticklish situation.

Abhay Aima, head, equities and personal banking, HDFC Bank, is inclined to attribute the current rally to momentum players among the FIIs. "Investment decisions by large prominent FIIs -- who have a medium to long term India strategy -- rarely lead to sudden bull or bear runs which give the stock markets their volatile complexion," he says. He also suggests there are a group of second rung FIIs who collude with large brokerage firms to boost up scrip prices. Momentum players are important to the market in the sense that they bring in an enthusiasm (albeit artificial) that the rest of the investors can take advantage of.

June and July were unnerving months for the stock market with both, the FIIs and MFs executing more sales than purchases. MFs ended the month of June by pulling out nearly Rs 4.50 billion from the market. The ensuing month July, was marginally better in terms of the amount pulled out, and still ended with a deficit of Rs 1.71 billion.

FIIs, for their part pulled out Rs 9.35 billion in June and then did one better in the next month to dump Rs 14.02 billion worth of Indian paper. The frantic selling in July was also prompted by the rupee's gyrations as it tumbled from Rs 44.76 to Rs 45.94 in days.

The edginess on the rupee front could keep the FIIs in an uncertain mode for a while longer, as hedge funds generally resort to funding their dollar purchases through sales of paper in emerging markets.

As far as the mutual funds are concerned, it has been an unhappy situation for them over the last two months. The pressure on them was reflected in the unusually large cash positions (in some cases up to 30 per cent) in their portfolios. Under normal circumstances, MFs generally have cash reserves of around 5 to 10 per cent in their equity funds. Huge idle cash holdings with funds do not translate into any kind of returns for investors. But the recent purchases by the sector should see many of the funds reduce their cash holdings.

According to a fund manager, it has been sheer desperation which has prompted some of the fund managers to approach bull operators to stage a rally and bring in some activity in the information technology sector scrips.

With just another month to go for the half-year deadline -- MFs have to declare their audited results on September 30, 2000 -- it has become imperative for them to show some flesh on their bottom lines.

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