Foreign institutional investments nosedive

Kevin James in New Delhi

The political turmoil witnessed by India this month has taken its toll on foreign portfolio investments in the country. The net foreign institutional investments nosedived to $ 1.6 million during April 1 to 15 as against the $ 172.5 million in March, a five-month high since November 1996.

Marketmen attribute the surge in foreign portfolio investments in March to former finance minister Palaniappan Chidambaram's dream Budget. Led by the US and Hong-Kong-based institutions, the FIIs made heavy buying and selling in the post-Budget period till March 30, when Congress president Sitaram Kesri pulled the rug from the Deve Gowda government. While the FIIs made a gross purchase of $446.8 million, they also resorted to heavy profit-booking by selling scrips worth $ 276.2 million during this period, leaving a net investment of $172.5 million.

The political instability that followed the fall of the Deve Gowda government saw the FIIs cutting their operations in the Indian bourses in a big way, even when the BSE sensitive index swung forward and backward depending on news from the political front, particularly on the talks on the fate of the Finance Bill. The FIIs, in fact, used the occasional spurts in the market to unload their positions in the first half of April, with their gross sales during April 1 to 15 touching $ 114 million. As against this, their gross purchases during this period stood at $ 115.6 million, leaving a paltry net investment of $1.6 million.

The cumulative net investments made by FIIs stood at $7,598.6 million as on April 15, 1997. There are as many as 442 foreign institutional investors registered with the Securities Exchange Board of India at present.

The plunge in FII investment came at a time when both the finance ministry and the SEBI were expecting a massive increase in the inflow of foreign investment in the first quarter of the current fiscal. The optimism stemmed mainly from the market-friendly budget which was expected to bring small investors back into the capital market despite Moody's poor ratings.

Although the certainty of passing Chidambaram's Budget holds out a ray of hope for foreign portfolio investments, the fluid political situation will continue to affect the level of investments in the coming months, according to finance ministry officials. This will, in turn, affect the post-Budget market mood.

The officials have a point. Between November 1996 and March 1997, when the market was still passing through a bearish phase, the FII net investment levels were quite low, ranging from $88 to $113 million. The FII investments going back to that level in the coming months would mean another depression in the market sentiments.

Although Indian institutional investors and big players have stepped up their operations in the recent months, the FII investments still hold the key to the performance of the market, analysts point out.

The long bearish spell over the last two years is mainly attributed to the staying away of the common investors and the failure of the domestic financial institutions to play any effective role in the market, leading to the tight liquidity position and hardening of interest rates. Although both the finance ministry and SEBI tried to win the small investors over with some half-hearted measures, the latter remained unimpressed.

However, Chidambaram's Budget and the slack season credit policy announced by the Reserve Bank of India in the second week of April sparked a spell of bull run on the bourses. This has also triggered hectic activity on the corporate front, with many companies setting out to launch their long-pending public issues. A number of public issue offers are expected to hit the market in the next three-four months.