Mumbai: BSE’s benchmark Sensex rose 18.9% in the year ended 31 March, the most in four years, with share sales by domestic institutional investors aggregating around one-fifth less than it did last year, thereby offsetting a drop in foreign portfolio investments.
The BSE Mid-cap index gained 15.3% after declining in the previous two fiscal years, while the BSE Small-cap index rose 21.8%, its first gain in four fiscal years.
The strong performance across market indices came despite a drop in foreign institutional investors’ (FIIs’) inflows, which declined 47% from the previous fiscal year to $13.4 billion.
Domestic institutional investors sold Rs.53,549 crore of Indian equities, down 22.5% from the year before. The data excludes the figures for 31 March, which were not immediately available from market regulator Securities and Exchange Board of India.
The market rose sharply when money flowed in (from FIIs), explained Vaibhav Sanghavi, director of Ambit Investment Advisors, but didn’t correct when “flows were declining or negative”.
A significant part of the gains in the Sensex has come in the month of March alone, with FIIs investing $3.2 billion in Indian equities in the hope of a turnaround in the economy and a favourable outcome from the general election scheduled for April-May. Opinions polls conducted ahead of the election show that a Bharatiya Janata Party-led government is likely to come to power, an outcome which is seen as positive for the markets by many investors.
“The rally in the last six months has been triggered by expectations of a stable government post-elections. Going ahead, if the election results pan out as per expectations, and we see a stable government, the flows should continue to pour in India,” said Sanghavi.
FII flows remained volatile through the year, with foreign investors pulling out $3.7 billion between June and August, soon after the US Federal Reserve hinted at tapering its bond-buying programme, leading to nervousness across global markets. India, along with other economies that were running large current account deficits bore the brunt of selling from foreign investors.
“A larger part of the blame can be attributed to the fiscal deficit and current account management, though CAD (current account deficit) did come under control in the second half. Economic growth has been suffering and that had been a major turn-off for FIIs,” said Deven Choksey, managing director and chief executive of KR Choksey Shares and Securities Pvt. Ltd.
India’s current account deficit touched a record high of $88.2 billion, or 4.8% of gross domestic product (GDP), in 2012-13 before sharply narrowing to $4.2 billion, or 0.9% of GDP, in the quarter ended December, helped by higher exports, falling imports and a moderation in gold imports.
The Indian economy grew at an anaemic 4.7% in the quarter ended December, slower than the 4.8% pace in the preceding three months. In fiscal year 2013, the economy grew 4.5% —its slowest pace in a decade.
While January’s industrial production data was better than expected (0.1% after three months of contraction), growth remains tepid and the investment cycle is yet to take off.
Meanwhile, for the Indian debt market, it was the worst year ever, with FIIs pulling out $4.6 billion. Prior to this, the only fiscal year when debt saw net outflows from FIIs was 2006, when they sold a net of $1.6 billion of debt.
Experts say things are set to improve from here on with the rupee regaining some of its strength. The local currency touched its all-time low of 68.85 against the dollar on 28 August, and has since rebounded 14.96%. It closed 59.89 to the dollar on Friday.
“We saw massive outflows in last fiscal year mainly due to steep rupee depreciation,” said Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management Co. “My sense is that flows will rise in the new fiscal year. The rupee is stable, absolute yield levels are also high, and so money will continue to pour in. The only hiccup I foresee is that if the election outcome is not favourable and triggers a negative reaction in the markets.”