FII activity in India from 1992-2006

The Indian financial market was opened to the foreign institutional investors in 1992 to widen and broaden the Indian capital market. Since then, the net investment by FIIs in India has been positive every year except in 1998-99. During the last few years, there has been a phenomenal increase in the portfolio investment by FIIs in the Indian market. (Table 1 & Chart 1). The gross purchases of debt and equity together by FIIs increased by 59.9 per cent to Rs.3,46,978 crore in 2005-06 from Rs.2,16,953 crore in 2004-05. The gross sales by FIIs also rose by 78.6 per cent to Rs.3,05,512 crore from Rs. 1,71,072 crore during the same period. However, the net investment by FIIs in 2005-06 declined by 9.6 per cent to Rs.41,467 crore in 2005-06 from Rs.45,881 crore in 2004-05 mainly due to large net outflows from the debt segment. The cumulative net investment by FIIs at acquisition cost, which was US$15.8 billion at the end of March 2003, rose to US$ 45.3 billion at the end of March 2006. (Chart 2) The provisional net investment figure as of March 2007 was US $ 3225 million as per RBI Table1:InvestmentsbyFIIs

Source : SEBI Annual Report 2005-06

Chart 1 : FII Investments in India

Source : SEBI Annual Report 2005-06 Chart 2: Trends in FII Investment

The FII investment in equity increased significantly since 2003-04. During 2005-06, FIIs increased their net investment in equities, but reduced their commitments in debt Securities (Table 2). The net FII investment in equity during 2005-06 was Rs.48,801 crore, the highest ever in a single year. Buoyancy in the markets was sustained in 2005-06 on account of surge in net investment by the institutional investors with FIIs playing a major role. Month-wise, FII investment was negative in the months of April, May and October 2005. However, during the remaining months of the financial year, there was large net equity investment by FIIs,

particularly in the second half of 2005-06, which drove the benchmark indices to surpass the earlier record highs on several occasions. The net FII investment in December 2005 was the highest for 2005-06, followed by July 2005 and February 2006. However, month-wise, the FII investment in the debt segment was negative in all the months in 2005-06. The total net investment in the debt segment in 2005-06 declined by Rs.7,334 crore mainly due to firming up of the yield rate of G-sec across the entire maturity spectrum. Table 2: Investments by MFs & FIIs

Source : SEBI Annual Report 2005-06 Several factors are responsible for increasing confidence of FIIs on the Indian stock market which include, inter alia, strong macro-economic fundamentals of the economy, transparent regulatory system, abolition of long-term capital gains tax and encouraging corporate results. Reflecting the congenial investment climate, the total number of FIIs registered with

SEBI increased to 882 as on March 31, 2006 compared to 685 a year ago, an increase of 197 over the year ( Table 3). The diversity of FIIs has been increasing with the number of registered FIIs in India steadily rising over the years.

Table 3: FIIs Registered in India FINANCIAL YEAR DURING THE YEAR TOTAL REGISTERED AT THE END OF THE YEAR 0 3 156 353 439 496 450 506 528 490 502 540 685 882

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

0 3 153 197 99 59 59 56 84 48 51 83 145 210

Source : Expert Group Report, GOI 2005

SOURCES OF FIIS As on March 31, 2006, SEBI had registered FIIs from 37 countries. The highest number of FIIs, as on March 31, 2006, was from the USA (342), followed by the UK (148). About 90 per cent FIIs come from the top 13 countries. There has been increase in the number of FII registrations from non-traditional countries like Malaysia, Australia, Saudi Arabia, Trinidad and Tobago, Denmark, Italy, Belgium, Canada, Sweden, Ireland etc. (chart 3). These developments have helped improve the diversity of the set of FIIs operating in India. Chart 3: Country-wise FIIs Registered with SEBI as on 31st March 2006

Several factors were responsible for increasing confidence of FIIs on the Indian stock market which include: Strong economic fundamentals and attractive valuations of companies. Improved regulatory standards, high quality of disclosure and corporate governance requirement, accounting standards, shortening of settlement cycles, efficiency of clearing and settlement systems and risk management mechanisms. Product diversification and introduction of derivatives.

Strengthening of the rupee dollar exchange rate and low interest rates in the US.

2.11 FII ACTIVITY FOM 2006-2010

2008 FII sell-off the largest ever The Indian equity market kept on sliding in September 2008 with the S&P CNX NIFTY, showing the second sharpest fall since January 2008, with a decline of around 10%. With all courtesy to the US financial markets and its crisis bug, an estimated amount of Rs 2.3 trillion of shareholders' wealth were eroded in the Indian stock markets. We hear a lot about sales and purchases made by foreign institutional investors (FIIs) in Indian equity markets, with these numbers often making headlines. Why are we so obsessed with FIIs? The answer, is "Indian markets are primarily driven by FII fund flows." The market slide can be attributed to lower FII inflows in 2011. A look at stock indices since 2006 shows that the markets peak when FII inflows are the highest and fall when FIIs are missing in action. For instance, in 2008, the BSE Sensex fell almost 50% due to the global financial meltdown, wiping out the gains of 2007. The year 2008 has seen the biggest ever FIIs sell-off for the Indian markets. FIIs were allowed to invest since 1991 when the economy opened up. FIIs sell-off of USD 13.16 billion or Rs 53,000 crores has accounted for a 20% sell-off of the total FII's equity investment since 1991. FIIs have invested USD 53.16 billion or Rs 2.3 lakh crores. The number of registered FIIs have increased from 1,219 in 2007 to 1,595 in 2008, while the number of registered sub-accounts have increased from 3644 in 2007 to 4872 in 2008. In 2008, there were negative FIIs' flows seen for 10 months, and the longest selling streak was seen from May to November. Since 1999, there have been 32 months of negative FIIs flows as against 88 months of positive flows. Since 2003, there have been 19 months of negative FIIs' flows as against 53 months of positive flows. October and January were two carnage months, where USD 3.8 billion and UDS 3.2 billion, respectively, were sold. The depreciation by 23% in rupee and the 51% sell-off in the markets has resulted in the Defty falling 61%, making India one of the worst emerging market performers for 2008. The biggest sell-off was seen in March, when the FIIs sold Rs 1,881 crore. In January, a correction bought the most at Rs 7,702 crore follwed by Rs 3,179 crore in June. "What hurt in 2008 was not the performance of companies but rapid outflow of $13 billion (Rs 55,000 crore) as investors fled risky assets," says Nick Paulson-Ellis, India head, Espirito Santo Securities.The markets were flat during the first three months of 2009 as FIIs stayed away. After that, governments across the globe implemented plans to boost their economies. India, helped by robust economic growth, became a preferred destination for investors.

85% was the surge in the Sensex in 2009 with FIIs investing a net Rs 84,000 cr, crossing the 2007 level. With FIIs investing a net $19 billion (Rs 93,100 crore) in 2009, crossing the 2007 level, the Sensex surged 85%. In 2010, the trend continued and FIIs pumped in $30 billion(Rs 1.3 lakh crore) into Indian equities, helping the Sensex gain 25%. Between December 2006 and July 2011, the number of FIIs registered in India rose from 1,024 to 1,730. Table 1: Net FIIs Investment in Equity (2007-10) MONTH JAN FEB MARCH APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC 2007 94.45 6065 1403.30 5431.80 4574.50 7939.60 18132.80 -7526.80 18948.50 15577.60 -4597.40 4896.70 2008 -17326.30 5419.90 124.40 979.00 -4917.30 -10577.70 -1012.90 -2065.80 -7937.00 -14248.60 -2820.30 1330.90 2009 -3009.50 -2690.50 269 7384.20 20606.90 3224.90 11625.30 4028.70 19939.50 8304.10 5317.80 10367.20 2010 5902.40 2113.50 18833.60 9764.50 -8629.90 10244.60 17120.60 11185.30 29195.80 24770.80 18519.90 1476.10

Table shows the position of FIIs investment in equity from 2006-10. It is clear from the above table that during 2007, apart from August 2007, FIIs showed keen interest in purchasing the equity in the Indian market. But so far as the month of August was concerned, FIIs turned towards net selling in equity for profit booking and seeing the massive sell out of shares in global markets including India especially on August 16 & 17 when there was massive equity selling. Consequently the SENSEX broke down to even 4 to 5% of its previous levels. Moreover, the bears took command of the market and some brokers also started off-loading their positions anticipating a further fall and stop loss button was pressed by many investors. So far as the month of October was concerned, the impact of supportive level was pulling the FIIs money in India. As a result positive impact in the net position was seen. Again a bearing trend could be noticed during November due to the fact that new norms about PNs were announced which ordered the winding up of PNs within next 18 months.

The analysis of the above table depicts a negative view of the FIIs investment in India during 2008. The main reason could be tremendous selling at the beginning of the year. The next three months i.e. February, March & April showed a consistent pattern in the trading activities. But from the month of May to November, FIIs again showed the exit mode from the stock market. This was due to the fact that impact of international recession had started affecting Indian markets also. Further the famous subprime crisis of USA e.g. the crash of Banks and investment firms like Lehman Brother had also started impacting global economy. Market analysts feel that the foreign fund managers were trying to play safe and therefore rushed towards risk aversion and taking off their money. Due to this reason a negative impact of FIIs was reflected showing immense selling and taking back their money from the Indian stock market. During the year 2009, FIIs investment in equity showed an initial sell off in the first two months, may be the impact of 2008 was still continuing. This year market sentiments seemed to improve from March onwards as the foreign investors starting returning with their investments. India emerged out as one of the better performing markets since October crash and the growth potential was seen. The trend turned positive with the sign of revival of economies. The trend of FIIs inflows witnessed during quarter from April to June continued further and FIIs proved to be the prime investors in the month of September. The reasons for such huge investments by FIIs in this month could be attributed to number of positive news about Indian economy. During the year 2010, the same trend of revival of economic activity could be observed. As a result, FIIs went on to purchase more equity during this year with the exception of the month of May. This showed positive view of FIIs about Indian market. FIIs started pumping funds into emerging markets like India because of its growth potential and stability of Indian Stock Market. Table No: 2 FII Inflows in Equity (2006-10) YEARS NET PURCHASE/ SALES RS. (IN CRORES) 2006 2007 2008 2009 2010

TREND %

32254.08 100.00 70940.05 226.978 -530517.70 -169.743 85367.2 264.494 140497.2 436.949 It is evident from this table that apart from the year 2008, in all other years, there has been a positive trend in FII inflows in India. The year 2008, as we all know, was the year of worldwide recession. The value of the trend is higher during last two years of this study i.e. 2009 and 2010 because of the fact that Indian economy could recover well from the shocks of worldwide recession due to its strong fundamentals and rules and regulations.

Table 3: FII Investments in Debt (2006-10) YEARS NET PURCHASE/ TREND (%) SALES RS. (IN CRORES) DEBT 2006 3629.18 100.00 2007 8356.13 230.248 2008 12340.40 147.68 2009 3458.40 28.025 2010 54442.80 1574.219 The analysis of the above table depicts the positive trend of FIIs investment in debt market. The sharp rise in the FII inflows into the debt market came after a sharp rise in the interest rates over the past couple of years which attracted the foreign investors towards the Indian market. Besides that market observers believed that the huge inflow into the Indian equity market also led to FIIs parking a portion of their capital into the debt market as a hedge against any potential downslide in the stocks. The sharp rally in rupee against the US dollar also led to an increase in the FII interest in the debt market. Table 4: Comparison between FII inflows & Industrial Growth Rate YEARS NET FII INFLOWS INDUSTRIAL GROWTH RATE (%) 2006 32254.08 7.4 2007 70940.05 7.6 2008 -530517.70 9.8 2009 85367.2 6.3 2010 140497.2 5.8 The analysis of above table shows that there is a Low Degree of Correlation between FII inflows & Industrial Growth Rate. It means that during the period under study, with the increase of FII inflows, the industrial growth of India also rose up. Industrial growth plays a pivotal role in increasing the GDP. In the year 2008, in spite of major outflows, the industrial growth rate still increased. During the next two years, a fall in industrial growth can be observed. Thus it can be safely said that industrial growth rate has not been much influenced by the FII inflows. Table 5: Relationship between FII Inflows & SENSEX YEAR SENSEX FII INFLOWS 2006 13786 31254.08 2007 20826 70940.05 2008 9647 -53051.70 2009 17464 85367.20 2010 20509 140497.20

Table 5 shows the impact of FIIs on SENSEX. In 2006 the foreign institutional investors (FII) inflows were a bit slow, but they once again proved that they were the drivers of the Indian equity market. Interestingly, the dependence of the Indian equity markets on the foreign investors was further proved by the fact that in the period between May 10, 2006 to June 14, 2006, when the SENSEX moved from a high of 12,612.38 to a low of 8,928.44. In the year 2007 when FIIs were pumping money in stock market and were Net Buyers of Equity worth Rs. 70940.05 Crores; the SENSEX was moving upwards on the weekly basis. It took nearly two months for the SENSEX to move from the level of 15000 to 17000. But from 17000 to 20000 it moved in a span of few weeks i.e. from 26th September 2007 to 29th October 2007. As the Indian markets move from one peak to another this year, foreign institutional investors (FIIs) have pumped top dollar into stocks. Investments during 2007 by foreign funds were the most influential group of investors in the market. In September, FIIs injected $2.7 billion into the markets, sending the benchmark indices to record peaks. The bulk of this amount came in after the US Fed cut interest rates on September 18 which ultimately led to increasing liquidity in global markets. In January 2008 the SENSEX touched the new height of 21000. This rally of 1000 points of SENSEX infused Rs. 2403 Crores during a period of just 49 trading days. But in the later part of 2008 the SENSEX crashed affecting large number of investors. The major cause of this crash was attributed to the recession in the global economies, especially with the US dollar losing its strength to the Indian rupee. A large amount of equity in the form of shares was floated in the Indian economy as an impact of Foreign Institutional Investors (FIIs) withdrawing their money from the Indian markets. This has disturbed the demand and supply ratio to a great extent resulting in easy availability of shares of well-performing companies, thus leading to a dip in the selling price of these shares. However, in 2009 with the sign of revival of economies, the trend turned positive and overseas investors started betting big on the domestic bourses as the liquidity conditions started improving. In 2010 most of the stocks which have shown an increase in prices were driven by huge FII buying. India continued to be a favored destination for FIIs and would continue to be so because of its strong fundamentals. This could well be reflected in the FII inflows towards the country, which had already reached all-time highs. Thus it can be observed that there is a positive correlation between FII inflows and SENSEX. PROPPING UP STOCKS Investing in stocks with high FII interest can give good returns. For instance, the FII holding in HDFC has been 58-60% since 2008. Similarly, the FII holding in ICICI Bank has been 38-40% for years. Between March 2008 and 29 September 2011, HDFC Bank and ICICI Bank have risen 35% and 20%, respectively.

PRESENT SCENARIO (2010-2011) Recent Trends in Foreign Institutional Investment Foreign Institutional Investors play an important role in Indian securities markets.Since 1992-93, when FIIs were allowed entry into Indian financial markets, foreign institutional investment has increased over the years except in 2008-09. In tandem with the boom in stock markets and a better global scenario, investments by FIIs into India were quite high in last few years, particularly since 2003-04. FIIs made a record investment in the Indian equity market in 2010-11, surpassing the 2009-10 inflows.

Chart: Trends in Foreign Institutional Investment The gross purchases of debt and equity by FIIs increased by 17.3 percent to 9,92,599 crore in 2010-11 from 8,46,438 crore in 2009-10 (Table 2.50). The combined gross sales by FIIs also increased by 20.2 percent to 8,46,161 crore from ` 7,03,780 crore during the same period in previous year. The total net investment of FII was 1,46,438 crore as compared to of 1,42,658 crore in 2009-10. This was the highest net FII investments into Indian securities market in any financial year so far.

Table : Investment by Foreign Institutional lnvestors

Cumulative investment by FIIs at acquisition cost, which was US$ 89,335 million at the end of March, 2010, increased to US$ 1,21,561 million at the end of March, 2011. During 2010-11, FIIs invested 1,10,121 crore in equity and 36,317 crore in debt as compared to an investment of 1,10,220 crore in equity and 32,438 crore in debt during 2009-10 respectively (Table 2.51 and Chart 2.12). Month-wise, the net FII investment was the highest in equity segment in October, 2010 (28,563 crore) followed by September,2010 ( 24,979 crore) and November,2010 (18,293 crore). In debt segment, FII investment was the highest in January, 2011 (10,177 crore) followed by July, 2010 (8,107 crore) and September, 2010(7,690 crore).

The FIIs have been permitted to trade in the derivatives market since February, 2002. The cumulative FIIs trading in derivatives was 5,34,748 crore as on March 31, 2011 as compared to 3,88,310 crore as on March 31,2010. Open interest position of FIIs in index options was the highest at 11,33,838 crore by end-March 2011, followed by stock futures( 6,22,875 crore), index futures (2,83,890 crore) and stock options ( 22,547 crore) (Table 2.52).

Table 2.51: Investments by Mutual Funds and Foreign Institutional lnvestors

Chart: Net Institutional Investment (crore) and Monthly Average Nifty Registration of Foreign Institutional Investors and Custodians of Securities There was a small increase in the number of Foreign Institutional Investors (FIIs) registered with SEBI. As on March 31, 2011, there were 1,722 FIIs registered with SEBI as compared to 1,713 a year ago, showing an increase of 0.53 percent during the year. There were 5,686 sub-accounts registered with SEBI as on March 31, 2011 as compared to 5,378 as on March 31, 2010, an increase of 5.73 percent The number of custodians registered with SEBI under the SEBI (Custodian of Securities) Regulations, 1996 was 19, as on March 31, 2011, as compared to 17 a year ago. Status of registration of FIIs, sub-accounts and custodians during 2010-11 is provided in below Table Table : Number of Registered FIIs, Subaccounts and Custodians

The Indian economy has successfully proved its mettle time and again in terms of financial stability and economic sustainability as it has resiliently weathered global financial turmoil. Where majority of emerging economies are experiencing huge capital outflows by foreign institutional investors (FIIs), Indian markets have managed to hold their confidence as well as investments during such times. A report titled 'Doing Business in India' by Ernst & Young (E&Y) further supports the fact by highlighting India as the second most preferred destination for foreign investors, next only to China. Overseas entities are among the important drivers for Indian stock markets. FII flows account for about 45 per cent of the market free-float. The overview further discusses recent developments, investments, facts & figures and Government initiatives pertaining to foreign investments in India. FII Recent Developments

According to the data released by Securities and Exchange Board of India (SEBI), FIIs purchased stocks worth Rs 600,000 crore (US$ 113.81 billion) during 2011. FIIs were also seen attracted to the debt market in 2011 wherein they infused Rs 42,067 crore (US$ 7.98 billion). This intense interest in debt markets helped India get a net FII inflow of Rs 39,353 crore (US$ 7.46 billion) for the year (taking both- debt and stocks- into account). Global rating agency Moody's has uplifted Indian bond market by upgrading credit rating of the Indian government's bonds from the speculative to investment grade. The move is expected to attract higher investments from FIIs and help companies raise funds at competitive rates abroad. India's foreign exchange reserves stood at US$ 297 billion as on December 30, 2011. According to the data available with the Bombay Stock Exchange (BSE), FIIs have consolidated their holdings in 11 out of the 30-Sensex firms during the July-September quarter of 2011. They majorly enhanced their holdings in auto stocks such as Mahindra & Mahindra, Maruti Suzuki, Hero MotorCorp and Bajaj Auto. The number of FIIs registered with SEBI stood at 1,749 as of October 2011, while the number of FII sub-accounts was 6,058 during the month. The statistics revealed that there were 1,743 FII accounts and 6, 028 sub-accounts at the end of September 2011

FII- Key Investments

FIIs have bought stakes in BSE and National Stock Exchange of India (NSE) recently. Argonaut Ventures (a US-based private equity firm) increased its stake in BSE from 2.54 per cent at the end of May 2010 to 4.75 per cent at the end of June 2011, while couple of SEBI-registered FIIs and sub-accounts bought stakes in NSE.

India-based micro-lender SKS Microfinance has raised investment limit for foreign institutional investors in the company to 74 per cent from 24 per cent and the company plans to raise funds of up to Rs 5 billion (US$ 94.84 million) through a share sale to institutional investors by March 2012. World Bank's private equity arm IFC has made its single-largest country exposure to India at 8.8 per cent of total committed portfolio in fiscal 2011. Also, India is expected to take the lead during the fund allocation for the current fiscal (year ending June 2012), when IFC's approved funding is estimated at US$ 10 billion. According to market insiders, IFC plans to scale up equity investments over debt funding in private firms in India. According to data released by auditing and consultancy firm KPMG, first three quarters of 2011 witnessed a 31 per cent increment in private-equity (PE) investment to US$ 7.89 billion. Private equity firms like Blackstone India and Kohlberg Kravis Roberts & Co (KKR & Co) are betting high on Indian markets. The Blackstone India chief was reported to have said that he intends to close 5-6 deals a year in India whose financial valuations would revolve around roughly US$ 100 million to US$ 120 million each. As on October 31, 2011, FIIs injected Rs 41,253 crore (US$ 7.82 billion) in Government securities (G-secs) and Rs 68,289 crore (US$ 12.95 billion) in corporate bonds.

Government Initiatives Government of India keeps taking different initiatives in order to attract FII investments. For instance, investment limit in infrastructure bonds was raised from US$ 5 billion to US$ 25 billion in March 2011. Similarly, in November 2011, the Ministry of Finance enhanced investment limit for FIIs in G-secs and corporate bonds by US$ 5 billion each, increasing the cap to US$ 15 billion and US$ 20 billion respectively. The Government intends to increase capital flows in Indian markets through such measures that would eventually increase the availability of resources for Indian corporate. Also, along with the debt instruments issued by infrastructure companies, FIIs can now also invest in debt instruments issued by non-banking financial companies (NBFCs) categorised as 'Infrastructure Finance Companies' by the Reserve Bank of India (RBI). In a bid to attract more FII funds into the Indian infrastructure sector, the Government is considering a trim on the lock-in-period in the corresponding bonds to one year from three years. The Government's top priority seems to be the enhancement of investor base for the Indian markets. That is why the Ministry of Finance started 2012 with a happy announcement by allowing foreign nationals, trusts and pension funds to invest directly in the country's listed companies from mid-January 2012.

EPISODES OF VULNERABILITY IN INDIA There have been some episodes of vulnerability in India, which are negative shocks affecting the economy, and influencing the behavior of investors. These are: the East Asian crisis in 1997, the Pokhran Nuclear explosion (May 1998) and the attendant sanctions, the stock market scam of early 2001, and the Black Monday of May 17, 2004. The investment behavior of the FIIs vis-vis the movements of the stock market indices during these episodes FII investment behavior during these four specific events indicates that these events did affect the behaviour of the foreign portfolio investors. But, these events did affect domestic investors behaviour as well. The critical question to ask is: whether there was any perceptible difference, particularly with a bias towards destabilization, in the behaviour of the FIIs vis--vis that of domestic investors? Table 7: India: FII Behaviour During East Asian Crisis

Table 8: India : FII Behaviour in the aftermath of Pokhran Nuclear Explosion

Table 9: India : FII Behaviour during the Stock Market Scam 2001

Table 10: India: FII Behaviour around Black Monday, May 17, 2004

These experiences show that FII outflow of as much as a billion dollars in a month which corresponds to an average of $40 million or Rs.170 crore per day has never been observed. These values Rs.170 crore per day are small when compared with equity turnover in India. In calendar 2004, gross turnover on the equity market of Rs.88 lakh crore contained Rs.5 lakh crore of gross turnover by FIIs. This suggests that as yet, FIIs are a small part of the Indian equity market. Transactions by FIIs of Rs.5 lakh crore in a year might have been large in 1993, but the success of a radical new market design in the Indian equity market have led to enormous growth of liquidity and market efficiency on the equity market. Through this, Indias ability to absorb substantial transactions on the equity market appears to be in place.

RECENT DEVELOPMENTS FII investment limit in government securities, bonds hiked The finance ministry on Nov 18, 2011 decided to increase investment limit of Foreign Institutional Investor (FIIs) in government securities and corporate bonds by $5 billion as the current limit for this year has almost been exhausted. Now, an FII can invest up to $15 billion in government securities , and for the corporate bonds the cap has been enhanced to $20 billion. The changes will be effective in the next few days after the Securities and Exchange Board of India issues a circular and notifies it. FII investment in India has reached its current limit for both government papers and corporate bonds, reflecting confidence of foreign investors in Indian economy. As on October 31, 2011, FIIs have invested more than Rs 41,000 crore in government papers and Rs 68,000 crore in corporate bonds. The present ceiling for government securities is Rs 43,650 crore and for the corporate bonds it is 74,000 crore. The changes are likely to enhance capital flows and investments at lower cost. Indian corporates also have enough room to borrow through the External Commercial Borrowing route where the cap is $30 billion, of which, so far, this year's borrowings have touched $21 billion. In September, the government had relaxed norms for FIIs investment in long-term infrastructure bonds, reducing the residual maturity period to one year for investments of up to $5 billion. Though the government had raised investment limit of FIIs in long-term infrastructure bonds from $5 billion to $25 billion in the 2011-12 Budget, investments under this scheme had a minimum residual maturity of five years and were subject to a minimum lock-in period of three years. From the table below, we can see that as on October 31, 2011, FIIs have nearly exhausted the investment limit in government securities and corporate bonds. This move will further give an investment opportunity of approximately Rs 25000 cr in each, government security and corporate bond (assuming a conversion rate of Rs 50). However, the investment in long term infrastructure bonds is merely Rs 2837 cr (in the first 7 months of FY12 ) versus the limit of Rs 112095cr

Since infrastructure is a key area where India is still lacking, the government should bring in reforms and attract investments in infrastructure, which can further boost the country's economic growth. The move will help in cooling the 10-year government bond yields, and will reduce the borrowing cost for the government. Further, this will also help in developing our bond market.

We further feel that this move will attract a lot of FIIs, as the interest rate cycle in India is almost at its peak. Going forward, there could be a rise in the prices of the bonds, leading to better capital gains. It will also ease some pressure from the government with respect to the rupee, which has depreciated in the past couple of quarters. Overall, the move has multiple purposes. such as moving a step ahead for developing the bond market, helping the rupee stabilise, a cool off in the 10-year bond yield to some extent and attracting foreign investment in the country.

Particulars

New Cap for Investment (In USD bn)

Old Cap for Investment (In USD bn)

Investment limit according to old cap (Converted into INR Cr)

Investment made by FII according to old cap (Converted into INR Cr)

Government Securities Corporate Debt Corporate Debt - Long Term Infra

15 20 25

10 15 25

43650 74416 112095

Additional Investment could be made (Assuming Conversion rate of Rs 50) in INR Cr 41253 25000 68289 2837 25000

2.13 FII activity in 2012 The investment by overseas investors into Indian stock market since the beginning of 2012 has crossed $7 billion level, out of which more than $5 billion were pumped in the month of February. Foreign Institutional Investors (FIIs) purchased equities and debt securities worth a gross amount of Rs 76,548 crore in January 2012, while their gross sales for the month were worth Rs 50,219 crore, translating into a net inflow of Rs 26,329 crore, as per data compiled by the market regulator Sebi. Overseas investors poured in over Rs 26,000 crore ($5.08 billion) in Indian markets in January 2012, the highest one-month net inflow in 16 months, as sentiments got a boost from easing inflation concerns and attractive valuations. The Foreign Institutional Investors (FIIs) infused a net amount of $ 5.12 billion (about Rs 25,212 crore) during February, taking the total for 2012 so far to $7.16 billion for the Indian stocks. Market analysts attributed strong FII inflows to signs of a reversal in RBIs monetary policy and the subsequent impact of improved liquidity position. They expect the positive trend to continue further, given that the liquidity conditions remain strong.Market analysts attributed strong FII inflows to signs of a reversal in RBI's monetary policy and the subsequent impact of improved liquidity position. During February, FIIs were gross buyers of shares worth Rs 79,898.6 crore, while they sold equities amounting to Rs 54,686.6 crore, translating into a net investment of Rs 25,212 crore ($ 5.12 billion), as per data available with market regulator Sebi. This is the highest monthly net investment by FIIs in equities since October 2010, where they had infused Rs 28,563 crore. The foreign fund houses also infused Rs 1,0016 crore ($2.03 billion) in the debt market last month. This takes the overall net investments by FIIs into debt markets to Rs 25,987 crore ($5.08 billion) so far this year. FIIs have been infusing money into the Indian market due to change in RBIs monetary policy that have added liquidity to the system. This liquidity will help in growth of the country, Wellindia Executive Director Hemant Mamtani said. Indian market will continue to witness inflows in the whole year, if the liquidity conditions remain strong, he added. Strong surge in FII inflows in 2012 so far has helped boost the equity markets, as also the rupee. The stock market barometer Sensex has gained 15 per cent in 2012, despite a fall of about 3.25 percent last month. The index finished at 17,752.68 on February 29. FIIs had mostly stayed away

from Indian equities in 2011. They flocked towards the debt market last year with a net investment of Rs 20,293 crore, while pulling out Rs 2,812 crore from equities. In the year 2011, FIIs purchased stocks and bonds worth Rs 8 lakh crore, but sold securities worth Rs 7.9 lakh crore, resulting in a net investment of Rs 17,480 crore during the year. Strong surge in FII inflow in 2012 has helped boost the equity markets as well as helped the Indian rupee to strengthen. The foreign fund houses have also infused Rs 17,281 crore in the debt market so far this year. Strong surge in FII inflow in 2012 has helped boost the equity markets as well as helped the Indian rupee to strengthen. It is not only India which has witnessed an upsurge in investment, equity funds focused on all emerging markets put together have seen an inflow of over $24 billion in 2012. "FIIs investments in debt market are rising because of higher yields on local bonds," Bandyopadhyay said. In terms of equity investment, foreign funds have poured in maximum money in infrastructure and pharma stocks, he added. This is the highest net investment by FIIs in stocks and bonds since September 2010. In 2012, FIIs infused money into the Indian market mainly on account of easing inflation, a relaxing of foreign investor restrictions and the RBIs policy moves, CNI Research Head Kishor Ostwal said. Stock market inflows in the first 17 days of February, at Rs 13,867 crore, were higher than that for the entire month of January 2012, which stood at Rs 10,358 crore.