The crash of the Indian Stock Market since January 2008 has been widely attributed to FIIs pulling their money out to meet liabilities and redemptions. According to this article, however, FIIs have only pulled out $12.7bn and still have another $53.7bn, or almost Rs. 270,000 Cr. left in the market. 

A lot of market experts are talking about the market being near the bottom (”Valuations just cannot get any cheaper! The Indian growth story is sound, even at 7%!”) Let’s be clear on this: these falling prices are not about fundamentals - its simply about lack of liquidity. FIIs are not exiting the market because they want to, but because they are being forced to - nobody wants to book such massive losses, and nobody would argue against the fact that as an emerging market India is looking pretty cheap.

The fact that there’s so much FII money still in the market - 80% - is quite scary. This means regardless of what’s going on in India, no matter how much inflation cools off, how much we lower interest rates, and how good our results are - if the Western econonomic scenario worsens, leading to more redemptions on foreign hedge funds and MFs then we’re, well, toast. 

What’s the answer to our prayers? Domestic Institutional Investors (DIIs)? Maybe, but unlikely. If FIIs keep pulling out, there’s only so much that they can do to support the market. Plus, they’ve got their own redemption problems to deal with…

The CII is suggesting that that SEBI / RBI should get together and put up a $6-7bn fund to infuse liquidity into the market. That doesn’t sound like quite enough.

Tags: Credit Crisis, Credit Crunch, DIIs, FIIs, Forecast, Redemptions, Stock Market, Stock Market Crash, Subprime, Subprime collapse, Trends

This entry was posted on Friday, October 31st, 2008 at 6:33 am and is filed under Economy, International. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.