India Finance Brief

Is the fact that foreign institutional investors have pulled out nearly Rs 3,400 crore from the Indian stock market month-to-date in May a sign of things to come?

Over the last few months, even if one were to look at the numbers in the previous two months of March and April, there was a net FII inflow to the tune of Rs 7,213 crore and Rs 6,749.60 crore respectively, making FII's net investors of equity. So what has changed to reverse this sentiment? Many experts believe that the main factor for this pullout has been the tightening monetary policy with interest rates being hikes for the ninth time in succession. In turn, there is immense interest rate pressure on companies so FII's have been selling the stocks of interest sensitive stocks.

This argument is further substantiated since FIIs have been bullish on the money market continuing to be net buyers and helping boost the overall net investment to Rs 560.90 crore in May. Government securities are not only considered a safe bet, especially in uncertain times, but also give higher returns in a high-interest environment.

According to the bears, the short-term momentum may continue to be negative for the market, since high interest rates are a significant damper for overall sentiment. On top of that most market men are closely tracking commodity prices and inflation before entering back into the equity fray. The fact that the government has hiked petrol prices by Rs 5 in New Delhi has caused most bearish experts to say that the markets can become positive only after the next 2-3 months. Adding to this sentiment, the Index of Industrial Production (IIP) slowed to 7.3 per cent, compared to 15.5 per cent expansion in the same month a year ago.

Taking all these cues under consideration in May the Bombay Stock Exchange's Sensex has headed southwards by three per cent to below the psychological level of 19,000.

But these negative cues are outweighed by the positive ones so the stock market is more likely to be range-bound this week. Most importantly, food inflation dropped to 7.7 per cent for the week ended April 30, the lowest level in 18 months which gives much cause for cheer. April figures also showed that Indian exports grew by an annualized 34.4 per cent to $23.9 billion in April.

Following the favorable election outcome there is a feeling that UPA-II could be better equipped to pursue long-pending reforms and bring the 2G scam culprits to task, while a Congress-led coalition will be able to push long-pending reforms in the financial sector.

About the author: Meghna Pant is a Contributing Editor for TradeBriefs. She can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .