A hundred million dollars a day. That's the kind of money foreign investors are putting into the Indian market these days.
Foreign institutional investor inflows this year have already touched $8 billion, much more than the $6.6 billion that came in last year.
More than $2 billion has come in the past two months alone. The money inflow has not only sent the indices skyrocketing, it is also threatening to push the rupee to new highs. But the biggest gainer has been India's market capitalisation.
From around $175 billion last year, India's market capitalisation has crossed $300 billion and is nudging the $350 billion-mark. Compare this with the measly 2 per cent growth between 1997 and 2002, when the market cap grew from $128 billion to $131 billion. In the same time, China grew its markets by a stunning 124 per cent -- from $206 billion to $463 billion.
Though India still has a lot of catching up to do with other Asian markets -- Korea is at $450 billion and China, too, is at about the same level -- it should get there sooner rather than later.
The main driver of these FII inflows has been the weakening dollar and the consequent shifting of dollar assets into non-dollar assets, especially in the emerging markets.
The trend has been accentuated in the past three to four months and is likely to continue till the dollar reverses.
Moreover, with the return of inflation, real interest rates in many places are the lowest they have been in a long time, reversing a trend where investors were better off holding cash in a bank.
There is an estimated $5 trillion held in bank accounts through Asia (excluding Japan), a multiple of the free float in these stock markets. So, the wall of money that could be looking for assets that do well in inflationary situations is high.
Within the Asian markets, India is one of the most attractive, given that it is the second fastest growing economy in the region after China, and has possibly the largest universe of quality stocks.
With currencies in the region strengthening, the flow of money into the region will only increase. India is now overweight in all emerging market indices and with valuations averaging those of Asian markets, is well positioned to capture a large portion of these flows.
Interestingly, almost a third of the FII money -- around $2.5 billion -- has come in through subscriptions to initial public offerings and secondary offerings.
Earlier this year, when the Indian government announced that it was planning to off-load portions of its stake in a clutch of companies, there were enough sceptics who felt the issues would not go through.
A sum of Rs 15,000 crore (Rs 150 billion) was believed to be too large for the Indian capital markets to absorb. But thanks to the huge appetite of FIIs, not only were the issues an outright success, another Rs 13,000 crore (Rs 130 billion) worth of paper was mopped up between ICICI Bank, TCS and NTPC soon thereafter.
The institutional portion of the NTPC issue was oversubscribed almost 10 times with bids coming in for as much as $5 billion, most of it from overseas investors.
The number of FIIs that participated was higher than ever before; compared with 60 to 70 FIIs that bid for the Maruti IPO in June 2003, more than 270 put in applications for TCS and more than 300 FIIs pitched for NTPC.
Without doubt, the larger IPOs like ONGC and ICICI Bank have prompted more global funds to take an exposure to India. In the future, too, it will take big issues to lure them; with 80 per cent of the market cap accounted for by 50 stocks, the FII limits for most of the big companies have nearly been exhausted.
Not only has the number of institutional players buying into the Indian market gone up, there are now FIIs of all sizes making for varied investment styles and objectives.
And, therefore, the universe of stocks that they can buy into is much larger today. While the bigger players such as pension funds may still prefer large cap stocks, they are not averse to buying into smaller firms and are now willing to look at companies with a market cap of just $350 million to $500 million.
And then there are the boutique funds taking an exposure to stocks that have market caps of just $50 million to $100 million.
According to a study done by a foreign brokerage firm, while FIIs own 31 per cent of the $3 billion to $5 billion market capitalisation band, they own almost 20 per cent of the $1 billion to $3 billion band and 21 per cent of the $0.5 billion to $1 billion band.
In fact, the weakening dollar has compelled the bigger asset managers to invest more of their corpuses in markets like India. While these asset managers were earlier investing only through India-dedicated funds or emerging market funds, they are now making allocations from their global fund.
These allocations are now up at 2 to 3 per cent and considering that the fund sizes are in billions of dollars, this is big money for a small market like India. It is estimated that in the past two months, around $700 million to $1 billion has come in from this source alone.
The profile of the Indian market is changing, thanks to the varied investment approaches of funds. There is more pension and endowment money today than there was last year.
Players such as Texas State Teachers Fund or Ohio State Teacher's Fund, College Retirement Fund and Calpers are all here. And about 20 per cent of the inflows is believed to have come through hedge funds. Some funds are looking for deep value, some for value, some for growth and some for arbitrage.
Hedge funds, which believe in absolute returns for their shareholders, are generally short-term investors. However, not all are rapid-fire momentum players and there are several that take a longer view.
Moreover, the huge volumes that these funds transact have lent liquidity to the markets, just as the funds with a longer-term outlook have brought stability.
Will the flows continue or are the merging markets simply the flavour of the season ? Much would depend on the direction of the dollar.
A reversal of the dollar in a snapback rally would certainly see some of the money flow out of emerging markets. Perhaps the first quarter of 2005 could see relative allocations swinging in favour of the US market and so some of the "froth money", perhaps 10 per cent of the inflows, could move back.
But over a longer time period, given the growth potential in countries such as India, FII interest would hold.
With increasing free-float market capitalisation, India's weightage in market indices will go up, compelling fund managers to take larger exposures.
India compares favourably with other emerging markets on parameters such as transparency, market liquidity and volatility, regulation, legal system and investor protection.
With the likelihood of Taiwan being phased out of the MSCI emerging markets index, India could attract marginally higher inflows. Most important relative to growth, the Indian market today is reasonably valued, though markets like Korea may be somewhat cheaper.
Any re-rating of the Asian markets in terms of an expansion of the price-earnings multiple would benefit India, too. If the corporate sector in India continues to turn in the kind of performances that it has, the Asian markets could soon have a new pecking order.