With foreign institutional investors (FIIs) pouring in a net $1.926 billion in five trading days, it’s no wonder that the Reserve Bank of India (RBI) is desperately trying to stem the tide. But FII investment is just one among many channels through which dollars are pouring in. The International Monetary Fund’s Global Financial Stability Report says international bond issuance from emerging markets increased from $64.9 billion in 2002 to $183 billion in 2006 and $146 billion in the first half of the current year. For India, the figures are: $5.6 billion in 2004 and 2005, $6.1 billion in 2006 and $7.4 billion in the first half of 2007.

But foreign bonds are just one way of raising dollars. If we add to that equity raised abroad by Indian companies and banks and foreign loans accessed by them, the total amount garnered by Indian companies and banks by way of bond issuances, equity raising and loans amounted to $10 billion in 2005, $12 billion in 2006 and $17 billion in the first half of 2007. The rise this year has been phenomenal, which is why RBI has had to buy record amounts of dollars to prevent the rupee from shooting through the roof.

The rapid rise of foreign issuances by emerging markets owes its origin to the same reason that has propelled foreign portfolio flows to emerging markets: rising risk appetite. The spread, or extra yield over US treasurys that investors demand to hold emerging market dollar bonds, is a good measure of this risk appetite.

Here’s the data on emerging market spreads: according to JPMorgan Chase & Co.’s EMBI+ index, this spread used to be as high as 725 basis points in 2002 and has been falling ever since, going down to an all-time low of 149 basis points reached on 23 May this year. It went up to over 250 basis points in August and was down to 195 basis points on Wednesday. Countries such as China have much lower spreads. Since the Indian government does not borrow abroad, Indian spreads are not given.

Emerging market bonds have, therefore, gained in two ways—one from the falling cost of capital all over the world and, two, from the tightening of the spread between them and the risk-free rate (US treasurys in this case). With the dollars pouring in from all these sources, RBI will have a very tough task on its hands trying to control liquidity.

Pantaloon: more than just Retail

The results for Pantaloon Retail Ltd‘s fourth quarter ended June were a disaster—core profit (before tax) halved to Rs10.5 crore from Rs22.8 crore, although sales rose by an impressive 76.9% to Rs1,020 crore. Gross margins fell by 560 basis points to 29.3%, which analysts say could be because of higher than usual discounts offered at its stores.

Another reason could be the decline in growth rates of same-store sales during the quarter. Same-store sales of the core value-retailing business grew by just 4.6% last quarter, a huge drop from near 20% levels in the first three quarters of the fiscal year. The entry of new players in the retail space seems to have eaten into Pantaloon’s share. Growth last quarter was primarily driven by new stores, which, to begin with, operate on lower margins. While value-retailing sales grew by a healthy 64% last quarter, about 93% of the increase in sales was from new stores.

For the year till June, core profit (before tax) rose just 1.4% to Rs92.1 crore. Pre-tax profit margin shrank to 2.85% from 4.85% in the previous year. In the first three quarters, core profit had risen by 20%.

Apart from declining gross margins, Pantaloon was also hit by higher interest costs, which rose at about double the rate at which sales increased.

The markets, interestingly, took the drastic drop in performance in its stride. Pantaloon shares declined by less than 3% to 526—at current levels, the core business is valued at an unjustifiably high 70 times trailing earnings. That’s because the markets are more interested in Pantaloon’s “unlocking" story. With the company offloading minority stakes in its subsidiary firms such as Future Capital Holdings Ltd and also planning initial public offerings (IPOs) for some of them, it’s now valued on a sum-of-parts basis. Future Capital had been valued at about ,000 crore by analysts, but the company now says that another subsidiary, Future Ventures India Ltd, would raise ,000 crore through a private placement and an IPO. Once analysts attach a value for this business too in their sum-of-parts model, the core business valuation would be much more reasonable. That’s why Pantaloon shares were largely unaffected by the drop in core profit.

Write to us at marktomarket@livemint.com