India's stock rises in foreign eyes
By Kunal Kumar Kundu

MUMBAI - China has largely been stealing the limelight when it comes to predicting the next big name in global stock markets. But India is grabbing more attention now, helped by the stunning 91.1% increase in the Morgan Stanley Capital International (MSCI) India index over the past three years.

Over the past one-year period, the MSCI India index rose by 22.32%. While it was slightly less than the overall returns generated by the MSCI Emerging Market Index (25.22%), it was well above the return generated by the MSCI Emerging Market Asia Index (a free float adjusted market capitalization index designed to measure equity market performance in emerging markets) at 16.31%. During this period, India emerged as the third-best performer in Asia after Indonesia (59.66%) and the Philippines (35.73%).

This strong performance has continued. Bolstered by gains in frontline stocks, the ranking of the India index in the global index tracker scale of MSCI has catapulted it to second position in Asian emerging markets during the past three-month period, after Indonesia. In this period, the Sensex (sensitive index of the Bombay Stock Exchange) has surged 18.62%, or about 950 points, to cross the 6,000-mark, while returns from India in the MSCI Index stood at 21.86%, outperforming the average return of 12.80% by Asian emerging markets.

Thus, despite concerns about the new government, which came to power in mid-May, and the subsequent crash on May 17, the markets have rebounded smartly. Expectations of an increased weightage for India in the MSCI Emerging Markets Index as well as sustained buying
from new foreign institutional investors (FIIs) has helped lift India's index. The improved performance of the MSCI India Index has resulted in a renewal of interest among FIIs in India since the MSCI is the benchmark index used by most FIIs for their local investment strategies.

The MSCI India index had performed relatively poorly in the first three months of 2004, but a lot has changed since the general elections. The Sensex recorded its greatest plunge in 129 years in May, following the surprise victory of the Congress Party, which ousted the right-wing Hindu nationalist administration. The market fell by more than 15% on the day and trading had to be halted twice. However, the new government, under the leadership of Prime Minister Manmohan Singh, architect of India's economic reforms in 1991, has passed muster of the global investment community and is now considered relatively stable.

The Indian economy has advanced in leaps and bounds over the past decade, helped by significant progress in driving down the cost of debt. Back in 1996, interest rates were about 12%; now they are about 7%. The low interest rate environment has released pent-up consumer demand, with many Indians now buying consumer durables with borrowed money. Growing domestic demand, together with increasing inflow of foreign direct investment (FDI) and a buoyant export market has contributed to strong growth since the start of the 1990s. The minimum rate at which the Indian economy is now expected to grow is 6%.

At the corporate level, India can boast numerous world-class companies that are financially sound and well managed. India is also the "I" in BRIC, the new buzzword for the economies tipped for future glory: Brazil, Russia, India and China. The Indian market accounts for just 0.24% of global stock markets by value, but India is now tipped to grow at a substantially fast pace. Goldman Sachs predicts that the country will be the third largest economy in the world in three decades.

Not surprisingly, the FIIs are thronging the Indian stock markets. FII inflows into India in 2004 have already crossed record levels of $7 billion, with as much as $1 billion coming in during November itself. Recently, a study by a leading business daily in India revealed that FII holdings in most of the 50 large companies in India have gone up. The FIIs now account for as much as 28% of the combined turnover of two major stock exchanges in India.

FII share in overall turnover

	Total turnover	FII turnover	FII share %
June	1,218.89	207.36	17.00
July	1,332.85	207.46	15.60
August	1,250.50	221.30	17.70
Sep	1,281.07	231.65	18.00
Oct	1,103.06	290.78	26.40
Nov*	457.23	125.52	27.50

* As on November 10, 2004
Unit: Rs billion
Source: Economic Times

As can be seen from the above table, the FII share in overall turnover has been increasing continuously since July 2004. As a vote of confidence on the Indian market, US fund manager Calpers has registered as an FII in India, earmarking it as a favorable investment destination in preference to countries such as China. Calpers' coming is clearly a watershed for the Indian market since most other funds look at Calpers as a benchmark for investing in various countries. Recently, the United Nations' Employees Pension Fund (UNEPF - one of the world's largest pension funds with assets amounting to $26 billion) registered as an FII in India. Missouri Teachers' Fund and Missouri Non-teachers' Fund also did the same. Overall, the number of new FII registrations this year has already touched 100 compared to only 83 last year.

The government is now studying the Lahiri report on foreign investment. Among the recommendations being considered are scrapping the need to pass resolution by companies to raise FII limits beyond 24%. This will automatically make the key MSCI index free floats of companies equal to the actual free float. At present, four of the top 10 market capitalization companies - Bharti Telecom, Indian Oil, National Thermal Power Corporation and Steel Authority of India Ltd - are not part of MSCI India due to their low floats. If these are included, India's weight in the MSCI could go up by 10%. Thus in the coming months, India can look forward to increased portfolio allocation as its importance in MSCI increases.

Kunal Kumar Kundu is a senior economist with a leading bilateral Chamber of Commerce in India. He has a Masters in Economics with specialization in econometrics from the University of Calcutta.

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