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There is no doubt that India as a preferred investment destination is gaining more and more acceptance with each passing day. India is now seeing inflows from all corners of the globe, be it global macro funds, hedge funds or exchange-traded funds. India's rise has not only made investors across the globe happy but has also been acknowledged by the 'Global Governance 2025' jointly issued by the National Intelligence Council (NIC) of the US and the European Union's Institute for Security Studies (EUISS) ranking India as the third most powerful country in the world after the US and China and the fourth most powerful bloc after the US, China and the European Union.

Of course there are other important factors like climate change, ethnic and regional conflicts, new technology, and the managing of natural resources in order to rate a country's resurgence, but none is as important as the economic might. And talking of economic might, Indian markets have been on a high for a long time; although a little subdued in 2008 owing to the global economic crisis, they are have been picking up steam since then and now almost on cruise control as the Bombay Stock Exchange managed to cross the psychological mark of 20,000 on the benchmark Sensex this September, powered by the fund flows from foreign institutional investors.

FII's Pumping in Huge Money

Since January, India’s equity and bond markets have attracted a record $33.8bn in foreign funds. FIIs (foreign institutional investors) have been net buyers to the extent of $5 billion, or Rs 25,000 crore (Rs 250 billion), in the month of September alone, pushing the Sensex by about 11 per cent during the month. FIIs have also broken all pervious records by committing in excess of $18 billion, or Rs 84,000 crore (Rs 840 billion), in Indian markets in a single calendar year, though we still have a full quarter to go in 2010.

Foreign Institutional Investors Activity During October-2010:

Equity (Rs.crore)

Dates Purchase Sales Net Purchase/Sales

25-Oct-2010 3,080.40 1,942.20 1,138.20
22-Oct-2010 3,878.80 2,499.80 1,379.00
21-Oct-2010 3,630.30 2,653.90 976.40
20-Oct-2010 3,103.10 2,292.00 811.10
19-Oct-2010 3,329.10 2,988.10 341.00
18-Oct-2010 4,166.30 3,350.60 815.70
15-Oct-2010 2,922.00 2,268.00 654.00
14-Oct-2010 5,492.10 2,597.70 2,894.40
13-Oct-2010 6,718.60 3,618.20 3,100.40
12-Oct-2010 3,092.50 2,392.40 700.10
11-Oct-2010 3,545.40 2,434.20 1,111.20
08-Oct-2010 3,602.80 2,795.30 807.50
07-Oct-2010 5,098.20 3,397.40 1,700.80
06-Oct-2010 5,235.80 2,950.40 2,285.40
05-Oct-2010 4,360.20 3,390.00 970.20
04-Oct-2010 4,750.20 2,831.30 1,918.90
01-Oct-2010 4,564.40 2,600.30 1,964.10

Total 70,570.20 47,001.80 23,568.40

India Investment Options

Some of the popular India investment ETFs include:

  • Wisdom Tree India Earnings Fund (NYSEARCA:EPI): The WisdomTree India Earnings Index is a fundamentally weighted index that measures the performance of companies incorporated and traded in India that are profitable and that are eligible to be purchased by foreign investors as of the index measurement date.

Expense Ratio: 0.88%

  • PowerShares India Portfolio (NYSEARCA:PIN): The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other.

Expense Ratio: 0.78%

  • iPath MSCI India Index ETN (NYSEARCA:INP): The Index seeks to represent approximately 85% of the free-float-adjusted market capitalization of equity securities by industry group within India.

Expense Ratio: 0.75%

  • iShares S&P India Nifty 50 Index (NASDAQ:INDY): The index measures the performance of 50 large cap Indian stocks.

Expense Ratio: 0.89%

  • EG Shares India Infrastructure (NYSEARCA:INXX): The index is a free-float market capitalization weighted stock market index comprised of 30 leading companies that Indxx, LLC determines to be representative of India's Infrastructure industries, as defined by the Industry Classification Benchmark (ICB).

Expense Ratio: 0.85%

  • EG Shares India Small Cap (NYSEARCA:SCIN): The index is a free float market capitalization weighted stock market index comprised of a representative sample of 75 Indian companies that Indxx LLC determines to be the representative of small market cap companies in India.

Expense Ratio: 0.85%

  • Direxion Daily India Bull 2x Shares (NYSEARCA:INDL): The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other.

Expense Ratio: 0.95%

  • Direxion Daily India Bear 2x Shares (NYSE:INDZ): The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other.

Expense Ratio: 0.95%

FII Contradiction

While India’s emerging market peers, including Brazil, Indonesia, South Korea, Taiwan and Thailand, have taken some measures to curb foreign capital inflows and are acting to suppress resulting currency appreciations, economists are warning that New Delhi may be underestimating the risks of excessive capital inflows, as huge foreign portfolio investment into India has helped push both the stock market and the rupee to pre-crisis levels.

Taking leads from the secondary market, the primary markets are also witnessing heightened activity. In September alone, 12 companies have closed their public issue. Even though markets have gained most of the ground lost, the rally has not been kind to all. Half of the stocks in the BSE Sensex are still trading at much lower levels compared to the highs seen in January 2008.

The Dilemma of Rupee Appreciation

In the past month the Indian rupee [INR=X 44.5 0.055 (+0.12%) ] has risen nearly 5 percent against the U.S. dollar. Last week the currency reached its highest level since the global financial crisis, hitting Rs44.11 against the dollar. India's Finance Minister Pranab Mukherjee has however said that huge FII inflow reflects foreigners' confidence in the Indian growth story and is not a matter of concern as of now, since the appreciation in the value of rupee is not abnormal; the Reserve Bank Of India (RBI) had intervened in markets last week to restrain a sharply appreciating rupee.

India: Booming Economy, Lagging Prosperity?

One the one hand while the Indian economy is booming, the country seems be losing its grip when it comes to societal prosperity as shown in the recent survey by Legatum Institute which looks at economy, entrepreneurship & opportunity, governance, education, health, safety & freedom, personal freedom, and social capital ( the trust people have in each other) as its index deciding factors. India has fallen 10 spots to 88th in a survey of 110 countries. China fared much better with a ranking of 58 on the list topped by Nordic nations.

Although Indian markets have been a success story in the past few years, not getting bogged down to extreme quarters even in the 2008 global recession, as part of the natural cycle, what goes up eventually comes down. It's very natural for people to be optimistic when the market is rising but the key to invest in Indian markets, just as any other world market, is to follow the fundamentals closely and walk a middle path. If invested in moderate levels, the Indian success growth story does indeed have a level playing field and immense wealth- creating opportunities for the domestic as well as the international investor.

Disclosure: No positions

Source: Correlating Capital Inflow and India's Surging Markets