The stock market regulator’s move to tame the stomping bull has failed and India continues to be the hottest investment destination. Foreign funds have invested close to $8 billion after September 17, when the US Federal Reserve cut interest rates by 50 basis points. In October till now the FIIs made a net investment of $5 billion. In 2007 they have invested over $17 billion.
The Securities and Exchange Board of India’s decision on participatory notes has created a shortage of floating stock as hedge funds have decided to hold on to their investment till they get registered as foreign institutional investors. Secondly, participatory notes are not trading in the derivatives market after the regulator imposed a ban on them. Since the note holders are not trading in the future market, the Nifty future and Sensex future are trading at substantial premiums.
As a result, the volume in the future market has declined by more than 30 per cent in the last two trading sessions. “This is virtually a cash market with hardly any depth as stock liquidity has declined significantly. Even a marginal incremental investment results in a huge mismatch of demand and supply,” said Yogesh Kapur of Enam Financial.
Foreign investors through participatory notes have invested over $80 billion under various instruments and more than $50 billion in equities. Since they are not selling, this is squeezing the floating stock.
Interestingly, Indian mutual funds have sold equity worth Rs 2,433 crore till October 25 and another Rs 1,265 crore in the previous month.