Will FIIs stay invested for long?

MUMBAI: Is all that foreign money finding its way into the Indian stock market serious money intended for the long-haul? This is a question worth billions of dollars for Dalal Street investors. From investor meets to dealing rooms, from media briefings to cocktails, this question is being raised at several forums.

Consider these: In the first eight months of 2007, foreign institutional investors (FIIs) had pumped in $8.3 billion in Indian stocks. And in exactly five weeks beginning September, this influential investor group has pumped in $6.27 billion. Compared to the eightmonth period when the average flow was a little over $1 billion per month, the figure has jumped to average inflows of $1.25 billion each week.

Top brokers and institutional dealers believe not all this inflow is intended for long-term investments. Market players estimated that about 25-30% of this $6-billion-plus funds could be from hedge funds, and this is certainly a larger percentage than in recent past.

However, they also said a lot of serious longterm investors with history of multi-year investments are also pumping money into Indian market. Not surprisingly, EPFR Global, a worldwide fund tracker, said that in the first week of October, emerging market funds have seen inflows worth $5.2 billion.

"A lot of short-term hedge fund money is finding its way into the Indian market now. And since most short-term money comes through the P-note (participatory note) route, it would be a while before the regulators get to know how much has come through this route," said an institutional dealer with a foreign broking house.

P-notes are offshore derivative instruments on Indian stocks sold by big brokerage houses to their foreign clients for a substantially higher fee than what the investors would have paid had they invested directly in the market, that is through the Sebi-registered FII route.

However, a large number of foreign investors prefer Pnotes which protect their identity and give them easy entry-exit opportunity. Market veterans warned investors to be careful about such short-term money finding its way into India.

"These are hot money coming from people who care only about short-term fast profits. These investors neither have much holding capacity, nor the commitment to stay invested for long," said head of a local brokerage. While the rising market (sensex has gained 16% since September 1) has attracted these short-term trades in large numbers, the rising rupee is giving them extra incentive to come to India.

"The rupee is appreciating against the dollar and is also expected to appreciate in the short run. So any investment in dollar-denominated funds would add to the investors’ market gain," said Arun Kejriwal, director, KRIS, an investment advisory firm.