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Signs of stability and maturity

For the Indian stock markets, 2007 was an exceptional year, not merely because of the phenomenal rise of the benchmark stock indices, the Sensex and the Nifty. The Sensex climbed from 12,500 in early January — itself seen to be reflecting healthy valuations — to close at 20,257 at the end of the year. The Nifty too set up new records and ended the year at 6,138. The strong performance of the domestic stock markets is part of the recent trend of Asian and other emerging markets coming into their own. The slowing down of the U.S. economy along with the persistent weakness of the American dollar has caused fund managers to seek more lucrative but safe avenues elsewhere. India and a few other markets filled the bill ideally. While foreign institutional investors (FIIs) have always been the dominant force behind the rise in market valuations, their motivations are now more varied. Besides, the successful economic growth story, with an average annual GDP growth rate of 9 per cent and above, remains intact. The onset of the sub-prime crisis in the United States in September, with strong negative connotations for the financial systems of the developed world, was the time when India along with a few other markets emerged as sanctuaries attracting large investments from across the globe. The Sensex went up from 16,000 to 20,000 in a matter of three months.

However, the important messages of the year 2007 go beyond the role of the foreign institutional investors. When the final tally is made it will be seen that, although the FIIs will be the single largest group of investors in the Indian markets, they are less dominant than in the recent past. Domestic financial institutions, led by the public sector LIC and the mutual funds, have invested substantial amounts and, on many occasions, taken positions that neutralised the FII actions, as they did remarkably in November and December when the FIIs pulled some $5 billion out of Indian stocks. Indian financial institutions were able to check what would have been a precipitous fall. The domestic retail investor base remains weak but volatility, which has been a worrisome feature, is showing signs of moderating. Insurance companies have overtaken mutual funds as the second largest category of investors. With a variety of investors having divergent objectives and different time horizons operating in the field and with no single category driving the prices, the Indian stock markets seem to be moving towards a greater degree of stability and maturity. For the new year, there cannot be a more salutary message.

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