Why Indian Markets Face The Great Chinese Wall?

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Foreign Portfolio Investors (FPIs) or call them FIIs if you wish own around 27 per cent of Sensex companies or 23 per cent of the market capitalization.

Why the Indian Markets Face The Great Chinese Wall?
When they start selling stock markets fall and fall sharply. On March 4, the Sensex scaled 30,000 points. The Sensex has fallen from 30,000 plus points to 27,000 points in less than 2 months.

This is in large measure to selling by foreign funds. In fact, they have net sold in the Indian markets for 11 straight days. On Thursday they net sold in the Indian markets to the tune of a huge Rs 3100 crores.

One cannot remember when we last saw such a huge net sell figure like that.

Money moving to the Chinese markets

If analysts are to be believed then cash is being moved away by foreign funds from the Indian markets to the Chinese markets. There are various advantages that FPIs see in doing that.

First and the foremost is that the Chinese markets are way cheaper. Indian Sensex stocks trade at a price to earnings multiple of 17 times one year forward earnings, while the benchmark Chinese market trades at 13 times. Cash will flow into anything that is cheaper.

Liquidity is also an issue. The market cap of Chinese stocks is the second highest in the world making it a very liquid market when foreign funds want to buy and sell.

A lot of regulatory changes have also been beneficial for FIIs in China. Foreigners were last year allowed to buy Mainland A shares through the Hong Kong Stock Exchange. Also, policy changes are very dynamic. The Chinese Central bank recently cut the reserve ratio for banks by a huge 100 basis points. Policies and decisions are proactive thus making it attractive for foreign funds.

In India nothing seems to be happening. Monsoon forecast is bad; crude oil prices are rising; Land Acquisition Bill and GST Bill are stuck.

The aura that Narendra Modi commanded is gradually fading with the several suicides of farmers in India. This may push pending bills like the Land Acquisition Bill on the backburner. 

Industrialists are still worried that the momentum of reforms has not yet picked-up and IIP data still remains poor. Deepak Parekh, recently said that changes on the ground have not happened. 

Arun Shourie, a former Minister in the Vajpayee Cabinet had this to say as quoted by PTI. "Government is talking big on economic matters but nothing is happening on ground. Delivery is missing," he added.

"The government seems to be more concerned with managing headlines than putting policies in place. The situation is like the many pieces of a jigsaw puzzle lying in a mess with no big picture in mind about how to put them together," he said in an exclusive interview with Headlines Today's Karan Thapar ahead of the first anniversary of the Modi government.

On the other hand everything is going well for China. In future fund allocation China will benefit unless India moves faster with its pace of reforms.


Read more about: sensex, gst, narendra modi
Story first published: Saturday, May 2, 2015, 10:14 [IST]
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