FII Flows: Tending towards the mean

S. Vaidya Nathan

THE year started off on a dramatic note as far as FII flows go.

After 1998, when they were net sellers, and 1999, when they seemed to just put back some of the pie taken out, 2000 kicked off with signs that FII flows may well exceed the 1996 high of close to $3 billion.

After a modest start in January, when the net inflows were $34.8 billion, February, March and April were among the best periods for FII inflows. The net inflows in these three months were $1.50 billion and is expected to remain at the same level at the end of the year. This is a clear pointer to the trends in the subsequent eight months.

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Incidentally, February and April saw the two highest ever-monthly inflows from FIIs since their advent in the Indian markets in 1993. Almost as if to counter-balance that, July and June were witness to the two highest-ever outflows, though of a smaller magnitude than the inflows in February and April.

At the end of the year, FII flows stand at close to $ 1.50 billion, a level that has been the case in the last four years (except 1998 when they were net sellers to the tune of $ 163.5 million). Table shows that after April too, FIIs traded heavily though net flows were marginal.

At the end of 2000, FIIs have close to $ 11.6 billion in Indian equities. This is more than the equity portfolio of the UTI and all the mutual funds put together. A better balance amongst institutional investors has certainly emerged. But the quality of the balance is somewhat distorted by the rather inactive role of the UTI except when it has to book profits to pay dividend in US-64.

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As far as FII flows are concerned, the net negatives are more than what they were at the end of 1999 in the Indian context and the global level. Similar levels of inflows can be expected in a best case scenario and, perhaps, lower levels in a more realistic scenario and the flows could go to select frontline tech stocks and some heavyweights in the various sectors -- overall, a more diversified pattern of investing than the concentrated one that was evident in 2000 quarter.