What bull return? FIIs are here just to mint money from mkt volatility

Foreign institutional investors have returned to Indian markets and have been buying over the last four trading sessions in equities.

Yesterday, when the benchmark indices rose more than 3 percent, the FIIs bought shares worth Rs 2,564 crore in the cash market alone. Over the last four sessions, they have pumped in about Rs 4,500 crore into Indian equities. This is against a Rs 23,000 crore selling they did during June-August.

For those who rejoice at the FIIs' new found love for Indian markets and their sudden spurt, here is a bad news. This is not permanent. The FIIs have returned just to make the most of the low values now and will go back anytime.

[caption id="attachment_1100547" align="alignleft" width="380"] AFP[/caption]

Yesterday's market rise was because of the all round feel good in the global markets. It has nothing much to do specifically with India. Apart from Raghuram Rajan becoming the RBI chief, nothing much has changed here.

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The recent market fall was more because of concerns about the geo political tensions in the West Asia, which pushed up international oil prices. Oil has always been India's sore spot as the country imports about 80 percent of its oil requirements. So higher global oil prices means, higher import bill for India. The fact that the country already had a very high current account deficit worsened the situation.

Another reason for the fall was fears that the US Fed will start unwinding its accommodative policies soon. This prompted FIIs to flee India and other emerging market currencies for safer US markets.

Both these factors along with the structural weakness of India because of stalled reforms resulted in the dismal sentiment for India, bringing about a downward spiral across asset classes.

The reason behind the drastic change in the market mood over the last four days is the positive global cues. The jobs data that came in last week has given rise to speculation that the Fed may have to lighten its action to taper off its quantitative easing policies.

On the West Asia front, the US has indicated that there will not be an all out war against Syria. There are also hopes that Syria and the US may find a way out in Russia's proposal asking the Arab nation to concede its chemical weapons for an international scrutiny.

Largely, these are the factors that have prompted the FIIs to fly back to India.

Yes, Indian authorities have also taken measures that have resulted in a change in FII perception.

The government has announced a slew of steps to attract foreign direct investments into India, which would help bridge the CAD. It has also curbed gold imports which has yielded results.

The RBI's measures to support the rupee, like the dollar swap for oil marketing companies and banks, are also having a positive impact on the currency.

However, the steps that already have results are short term in nature. Just quick fixes. Lasting positive changes can come in only through long term steps. For example, the opening up of sectors to FDI. The capital flow is not going to start overnight.

But still FIIs have evinced interest in Indian shares because of the cheap valuations after three months of hammering. And this does not mean that they will continue buying the stocks in the long term.

For the sentiment to remain bullish in the long term, India has to change structurally. That has not happened yet.

"...Nothing has changed at the ground level. The structural problems are quite deep-rooted and they cannot be just wished away in a matter of days because of a few legislative changes,"Dalton Capital India Managing Director U R Bhat has been quoted as saying in a BSreport.

Moreover, the big event in the US-QE tapering-is yet to unfold. The FOMC meeting on September 17-18 is expected to give out cues as to what the Fed's thinking on the issue is. Until then, FIIs will fly into India and back to make a quick buck from the prevailing volatility.

If the Fed reveals a clear roadmap, FII will also decide on their plan of action for emerging markets. This will accentuate India's structural weakness.

So do not rejoice at the FII return yet. These are fickle inflows.