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Foreign institutional investors (FIIs) pumped in $34bn in emerging markets in '03 and India managed to attract a fair share of 15% of total FII investment between January-November '03. This is for the first time that foreign investors bought $6.7bn of Indian equities last year, 120% higher than any other year in history.

The share of India market in the flows to the total emerging markets has been much higher as compared to its weightage in the MSCI Emerging Market Index which stood at 5.2%. According to a strategist with a leading FII, "India's weight in the index is probably low when compared with its 9.4% share in the GDP of emerging markets.

But this is because of a technical reason. The lower weight in the index is influenced by low free float and lower market-cap to GDP, driven largely by the fact that several large corporations and sectors are not listed on the bourses. But when GDP growth is going to be 8% then investors don't look toward index weightages."

An analyst said, "The flow of FIIs' investment in India has tracked the US yield curve or Fed-induced liquidity quite tightly over the past 10 years, with the only exception being in the aftermath of the September 11 terrorist attacks in the US when flows into equities did not rise despite a rise in the yield curve."

Except this, the flows to the Indian markets had a very direct co-relation with the policy of the Fed. This co-relation was visible even at the height of the tech boom in the late '99 and early '00 when the tech sector was the only face of the Indian market. The total flows in '03 were more than four times the 10-year annual average.

Since the consensus does not believe that the US Fed is raising rates for another quarter or two, the yield curve may not change direction in a hurry. Under such circumstances, flows may not slow down in the near term. However, the market is taking into consideration the local factors like general election.

In case of domestic investors, according to a Morgan Stanley research report, "The retail investors have been net sellers of equities through '02 and '03 and have reduced their stakes in the top 50 companies by m-cap by almost 5% over the past two years. They are likely to increase their exposure as domestic equity flows are not even halfway at the levels seen during the peak of the technology bubble." 

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