Rock band Guns 'n' Roses would have called this November Rain. Foreign institutional investors (FIIs) poured $1.5 billion in Indian stockmarket last month. December may be a flood. In the first six trading days of the month FIIs had invested $713 million in Indian equities. Fuelled by foreigners' fancy, Sensex touched a record high of 6386 points on December 6. So relentless was the buying that even an index heavyweight like Reliance Industries (14 per cent share in the Sensex) hasn't been able to play party pooper-a record of sorts.

Ironically, the UPA Government had come to power amidst some heavy offloading of shares by FIIs, which triggered off largescale panic selling. In two trading sessions alone-May 14 and 17-the Sensex shed almost 900 points. That's after it had touched a high of 6249 points in January. In the past 10 years, never has the index bounced back within a year. In 1994, when the index crossed 1992's peak, it fell and could make a comeback only four years later. In 2000 too, the fall in index from the peak could not be recovered. But then never has in the past so much of foreign money chased the limited supply of equities.

The main draw for the FIIs is the relatively higher returns on investments in India. The return on equity in India was 24 per cent in 12 months, which is among the highest in the region. In China it was 15 per cent during the same period. Eighteen months ago, when the Sensex was at 2800 level India's forward price earnings (P/E) ratio (a measure of a stock's market price relative to companies earnings in the coming months) was 9. "Today, the ratio is about 13, which is attractive for overseas investors," says John Ross, executive director, investment communications, Fidelity International.

Some large foreign funds are looking at India for diversification. Since June 2004 almost 100 new FIIs have entered India. The FII inflows also ensured that the flurry of IPOs-including the big ones like ONGC, NTPC and TCS-didn't lead to a diversion of funds from the secondary market to the primary market which could temporarily dampen the markets. Says Falguni Nayar, co-head of Kotak Securities' institutional broking arm: "India's market capitalisation has gone up too as have the deal sizes. Issues of the size of ONGC, NTPC and TCS immediately give momentum to the market." When these freshly issued shares get included in the Morgan Stanley Capital International index next year, India's weightage on the index, a benchmark for FII activity in emerging markets, will also go up.

IPOS IN THE WINGS

Shopper's Stop Punjab National Bank Bharat Forge Mars Restaurant Allahabad Bank (second issue of Rs 500 crore) Dena Bank UCO Bank Centurion Bank Dwarikesh Sugar ONGC Part II (5 per cent)* Jet Airways* Draft not yet filed with SEBI

A strong positive about the current bull phase is that the rally has been broadbased. In addition to it and PSU stocks, bank stocks have been buoyant mainly because of a pick up in credit offtake. Firming up of commodity prices kept old economy sectors like steel and cement in the limelight.

Then, of course is the comfort of strong macro-economic fundamentals. "India's projected growth rate at 6.5 per cent (after 8.2 per cent growth in 2003-4) is certainly attractive compared with the rest of the world. Add to that the rising profitability of corporate India," says Deepak Chhabria, head of institutional sales at IL&FS Investsmart. He claims India may have entered "a multi-year bull run, with scope of a few corrections".

What does a market dancing on the tunes of FIIs mean for small investors who can't time their sale and purchase with foreign investors. Almost everybody is cautioning of periodic corrections in the markets. Warns Ravi Mohan, managing director of Crisil: "Markets have reached such a high on buying pressure from FIIs that there's a good chance of a possible closeout in the last week of December before the fund managers go on a vacation." Amitabh Chakraborty, head of research at Kotak Securities, says retail investors must keep booking profits without falling into the trap of waiting for the peak.

At current prices, it is almost a no-no for retail investors to enter the equity markets. Those who have stayed invested for a reasonable period could look at booking profits in mutual funds too. "An FII sellout will hit NAVs of mutual funds too, so investors could book profits at current levels and then re-enter when they see an opportunity," says Mohan.

Index