Market's not overdependent on FII money. But when markets rise too much on lower buying power, they may tank on low selling pressures.
MUMBAI: The markets appear to be getting a bigger bang for every FII buck. Between January 1 and May 10, 2006, when foreign institutional investors (FIIs) invested Rs 21,569 crore net, the Bombay Stock Exchange Sensex rose 3,214 points.
That’s a 15-point gain for every Rs 100 crore of net FII investment. In the recent market surge since June 14, net inflows of just Rs 2,564 crore have boosted the index by 2,384 points, or nearly 93 points for every Rs 100 crore.
The good news is that the market is not overdependent on FII money. Domestic money is also important.
But there’s bad, news as well. When the markets rise too much on lower buying power, there is a big chance that they may fall equally quickly on low selling pressures.
“The markets, while they have undoubtedly gone up, do not inspire much confidence because the volumes have been low. Relating FII volumes to the market gives you a clear indication of how the markets are moving up even when foreign fund flows are comparatively low,” says Jayant Manglik, senior vice-president of RR Equity Brokers.
Looking at data for the ‘big-move’ days during the period from January 1, 2006, to May 10, 2006, it is observed that there were 22 trading days on which the Sensex gained more than 100 points. If one takes the average net FII inflows for these 22 days, it comes to approximately Rs 400 crore per day.
We leave out the period between May 10, 2006 (when the Sensex closed at its all-time high of 12,612 points) and June 14, 2006 (when it touched its recent low of 8,929 points), when the markets were tanking.
Picking up the FII threads again from June 15, 2006, when the markets started showing signs of a recovery (though there is no clear indication of whether it will sustain), the analysis reveals that there were 20 trading sessions on which the Sensex gained more than 100 points.
If one averages the net FII inflows over these 20 days, then it turns out that it took just about Rs 170 crore per day to get the markets up by over a 100 points.
The problem with this is that a scenario could emerge where the markets start tanking even if there is only a little bit of selling.
“The reverse is also true in this, which means that the markets could fall even if FII selling was not very large,” said Manglik. And history has shown that markets always fall faster than they rise. So the message for investors: be cautious at current levels.
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