The announcement by the Government that it will permit direct investment in Indian equities by qualified foreign investors (QFIs) has not set the markets on fire. While on Monday, the first trading day after the announcement, the BSE Sensex was up by a modest 63 points, on Tuesday it surged by over 400 points, mainly because of hopes that interest rates would begin to cool off. But on Wednesday, the markets were back to square one with the Sensex and nifty losing steam.

True, it is too early to assess the impact of the announcement and expect that investors from across the globe would queue up to invest. More so at a time of economic crisis in much of Europe, when the US economy is just showing signs of rebound and export driven economies in Asia are facing an uncertain future.

The Finance Ministry had expressed the hope that the move would attract more investment and reduce market volatility. It is not clear whether the psyche of foreign individual investors will be different from Indian investors. The market data shows that much of the trading is day trading and delivery based individual investment in equities is not very high which is essential for bringing stability to Indian markets.

Mr Dinesh Thakkar, Chairman and Managing Director, Angel Broking, Mumbai, said in “near-term, the move to allows QFIs is intended at attracting much needed portfolio flows to the Indian markets” at a time India is projected to run a current account deficit (CAD) of 3.5 per cent of GDP by the end of FY-12. But in the long term, it is a “sensible move to broad base the investor base to deepen our markets.”

He expected that investors from regions with a large and prosperous Indian diaspora like North America, UK and to a limited extent, the West Asia, to begin with, may be attracted towards investment in Indian equities as they may be more familiar with Indians and by extension to India. But in the long term, they may see opportunities in growing economies like India.

He said that at present, the awareness about India and Indian companies among foreign retail investors was “inadequate.” Possibly HNIs may jump start others to grab the opportunity.

Mr Dinesh Thakkar also cautioned against any expectations of dollars overflowing into India. He said issues such as taxation, exchange rate fluctuation and other macro-economic parameters played a crucial role in equity investingBut opening the doors to foreign investors will be not be an un-mixed blessing, as the country had seen in the case of FIIs, when surge in inflows and outflows affect the markets either way. He conceded that “market movements would affect flows both ways. It is unlikely that FII and QFI would counter balance each other. They would influence and amplify each other's actions.”

Explaining the reasons as to why the Indian markets did not get into a frenzy in response to the announcement, Mr Dinesh Thakkar said that the market was aware that the move was unlikely to alter the investor sentiment which revolved around “improvements in the macro economy and consequently earnings trajectory.”

> ryn@thehindu.co.in

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