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The FIIs pumped a record $6 bn in Indian equities in the month of October,
accounting for almost 25% of the total inflows in the current calendar year.
With this heavy inflow, the total investment by foreign funds has almost
crossed $25 bn in 2010 – the highest in a single year. After a frenzied rally in
the previous month, the Sensex and Nifty dropped an average of 0.2% in
October. This was primarily due to the fact that a large chunk of FII flows
were directed towards the mega public issue offering by Coal India and
overseas fund flows into secondary markets remained a trickle.
The RBI hiked the key policy rates – repo and reverse repo – by 25 bps in a
serious bid to rein in rising inflation which can get aggravated by the
structural nature of food price increases. Although food and primary
articles inflation have recently shown some signs of moderation, they
continue to rule high. However, the RBI has undertaken a cautious stance to
hike the rates in small increments in order to preserve the growth
momentum.
On the global arena, the markets are eagerly anticipating the US Fed’s
second round of Quantitative Easing (popularly known as QE2) in order to
stimulate growth and pull the US economy out of doldrums. Quantitative
Easing is essentially a monetary policy tool used by the Central bank to
increase the money supply in the economy by buying government
securities and other debt papers from the system. This process increases
the money supply by flooding banks & financial institutions with more
funds which can be utilized by them for their lending activities. This would
eventually drivedown the interest rates and borrowing costs for consumers
and prop up demand in the economy. However, the flipside is that although
more money is floating around, there is still a fixed amount of goods’ supply
available and more often than not this excess liquidity finds its way into
Emerging Markets rather than supporting the US economy.
Against this backdrop of volatile market scenario, the investors have a
daunting task of overcoming their emotions of extreme fear and greed.
Although market experts opine that the current valuations are ahead of
their long term averages, it is extremely difficult to determine their course
in the short run. This is simply because market movements are influenced
by a multitude of factors like fundamentals, liquidity, sentiments etc and the
extent of their influence also varies with time. For the investors, it would be
extremely pertinent at this juncture to have a judicious and a balanced mix
of equity, debt and alternate investments in their portfolio.
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