Firm global stocks, FII buying to boost bourses

An overnight rally in US stocks, higher Asian markets and buying by foreign funds would lift Indian equities today, 18 March 2009. Expectations of further cut in policy rates by the central bank remain with sharply falling headline inflation.

Asian shares were moderately higher Wednesday, 18 March 2009, after an upbeat session in the US, with building stocks helped by surprisingly strong US housing data. Key benchmark indices in Hong Kong, Japan, China, South Korea, Singapore and Taiwan were up by between 0.02% to 1.8%. Bank of Japan at its policy meeting kept the key interest rate unchanged at 0.1%.

US stocks surged on Tuesday, 17 March 2009, helped by news February 2009 housing starts increased 22.2% to a seasonally adjusted 5,83,000 annual rate compared to the prior month, after plunging 14.5% in January 2009. The Dow Jones Industrial Average rose 2.5%, its fifth gain in six sessions and its highest close since 19 February 2009.

As per provisional data released by the stock exchanges, foreign institutional investors (FIIs) funds bought shares worth a net Rs 415.12 crore on Tuesday. The substantial buying follows easing of FII selling vigour in the past few days.

Meanwhile, FIIs have responded enthusiastically to the government's decision to increase the cumulative investment limit in corporate debt from $ 6 billion to $ 15 billion. In an open bidding held at the National Stock Exchange (NSE) recently, a total of 24 bidders were allocated investments of Rs 29350 crore, the highest ever investment allocation by FIIs in India. In comparison, the net investment of FIIs in 2008 was only Rs 12069 crore. Since January 2009, FII's net investment in debt instrument has fallen by Rs 634 crore.

As per the Securities and Exchange Board of India (Sebi) data, $8 billion (Rs 41,000 crore) was available for allocation to FIIs and their sub-accounts in an open bidding platform.

Attractive interest rates have lured foreign funds to Indian debt market. For instance, corporate debt returns in the US are 1-1.5%, whereas in India, the rates are as high as 8-9%. Bonds floated by state-run firms fetch yields in the range of 9.30%, which are about 300 basis points higher than 10-year G-Sec yields. As per reports, FIIs are likely to invest in attractive PSU bonds floated by quasi-government entities like Power Finance Corporation and Rural Electrification Corporation.

Meanwhile, foreign direct investment (FDI) in India in January 2009 was up 55% at $2.73 billion from $1.76 billion for the same month in the preceding year. Up to September this fiscal year, the monthly inflows were in excess of $2 billion. However, the following three months witnessed a sharp dip in the overseas investment, due to the backdrop of the global financial crisis. The January figures bring a renewed hope that India is back on the radar of global investors.

A sharp fall in inflation in the past few months has provided room for the Reserve Bank of India (RBI) to cut policy rates. Japanese financial services firm Nomura expects a 100 basis points reduction in key short-term interest rates by RBI in April-June 2009 quarter.

However, the upside on the domestic bourses will be capped in the next two months due to political uncertainty ahead of parliamentary election to be held between mid-April 2009 to mid-May 2009.