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V Shankar Aiyar

AU CONTRAIYAR

Desi Bears vs Videshi Bulls

It is a paradox that is typically Dalal Street, perhaps peculiar to emerging markets.

Since the beginning of this year, foreign institutional investors (aka FIIs) have been pouring money into the Indian market. In just 15 trading days, FIIs have pumped in $ 637 million - or Rs 2979. 4 crore to be precise. And what have they bought? Mostly, technology, media/entertainment and telecom or new economy if you please. This despite the fact that many of these intelligent worthies had issued downgrades and put a freeze on ICE -- new economy -- stocks.

Even as you mull this over, let us consider what the Indian (desi) mutual funds have been up to. Over the past 15 trading sessions, Indian mutual funds have been net sellers. As of January 18, mutual funds investment cumulatively stood at a negative Rs 287 crore. In other words, while the FIIs have been rushing to buy Infosys, Zee and/or NIIT, our desi brethren have been rushing to sell. This, when they have gone blue reiterating that the fall in Nasdaq would not affect Indian tech stocks and that the slowdown in the US tech sector was unlikely to affect Indian scrips.

The net result: the bellwether BSE Sensex has moved from 3955 on January 1 to 4194 on January 19 across 15 trading days. And every point gained (see chart) has been thanks to the FIIs, but the rise has been barely 239 points. Mind you, the money pumped into the market in the first 15 days is more than half of what the market got in the entire year of 2000.

So what's happening here?

You could say that desi mutual funds are under redemption pressure, so they are selling. You could say the Bharat Shah effect is impacting their decisions. You could say the desi brigade is not too sure about the Nasdaq effect and would much rather sell at every high. You could say the desi funds are cherry picking --- not favouring either old economy or new economy as a sector. You could say, the desi mutual funds know that not much will come out of the disinvestment programme. You could say the desi gang understands the ground reality much better. That they know the might of this 23-party coalition (including the now-in-now-out Mamata Banerjee) better.

You could say the FIIs are paring their exposure in the US markets. You could say the FIIs are hoping for liquidity driven momentum in emerging markets. You could say FIIs are expecting some of the spillover into emerging economies to come to India (notwithstanding the MSCI). You could say the FIIs allowed the markets to be hammered down via their downgrades and are now picking at low levels - helped by overseas retail investors punting through $ 25000-plus participatory notes. You could say they are discounting the Bharat Shah effect. You could say this is the January effect. You could say the FIIs are bullish on India. You could say that the FIIs are hoping for more and substantive reforms (sale of PSUs). You could say the FIIs are taking a position on the budget. In a sense you could also say that the FIIs know something about the budget that the desi's don't.

Clearly -- if this rally lasts long enough -- Yashwant Sinha now faces a new level of expectation.

If you believe the mid-term poll theorists (which include Mumbai corporates and FIIs), this could well be Sinha's last essay before the next general polls and he could go all out to address the ailing economy. This is the theory that the FIIs seem to be buying on. The grapevine rooted in Mauritius-based funds has it that the finance minister will go all out this budget and that the players should expect everything short of capital account convertibility. The desi funds and other desi players (after all if the FIIs have bought stock worth Rs 2327 crore, stocks worth Rs 2040 crore have been sold by desi players) however don't believe in the FIIs Big Bang Budget Theory. Their contention is that if there are mid-term polls Sinha is more likely than not to shut the reforms shop and go populist.

While we will have to wait till 11 am on February 28 to figure out who called right, as of now the limited rally is giving players something to punt on, besides wagering on Bharat Shah's bail application that is.

(V. Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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