Big question: Why are FII funds still flowing to India?

London: Slowing growth and concerns relating to manufacturing and investment have taken centrestage for some time now despite finance minister Palaniappan Chidambaram’s pronouncements, but the pace of foreign institutional investment (FII) into Indian bourses seems to have surprised analysts and India-watchers.

Despite the 6.5 percent growth rate clocked in FY12 and the much lower 5.5 percent figure for the first quarter of FY13 (2012-13), FII investments have continued unabated. Importantly, the Reserve Bank of India’s stout refusal to lower key interest rates further have also been taken on board by institutional investors.

What seems to be surprising investors and India-watchers overseas is the continuing interest being shown by FIIs despite the obvious lack of any major policy action yet to spur investments and economic growth.

Interesting, however, is the reaction to India from even the average man on the street in Europe, despite the economic concerns. “Oh you have a 6 percent plus growth rate in your country,” exclaims a street artist in Montmartre, Paris, explaining that he is clued on to how India is faring vis-a-vis the rest of the world.

However, despite the obvious admiration for the comparatively higher growth rates still clocked by India, there are those sounding a warning, and underscoring the fickle nature of foreign portfolio investors.

An analysis in The Wall Street Journal’s European edition, titled “When will Indian stocks lose shine?” says India’s markets would do well to take the warning signs despite the robust flow of foreign money into the markets. The real reason could be that Indian stocks are still cheap compared to historic valuations this time round, a reason which could be prompting foreign fund flows to still seek out India despite the unpredictable policy environment and weakening fundamentals. FIIs have pumped in over $3 billion into the Indian bourses in the last two months, the paper says.

The WSJ analysis points to the fact that shares in the benchmark 30-share BSE Sensex are still trading at 13 times next year’s earnings, compared with the average of 16 times over the past five years.

“There are plenty of reasons to worry about India, though,” says the analysis. “The economic outlook remains cloudy.”

But this is still a far better rating in general from a European perspective, when viewed against what’s going on in Britain and elsewhere. The Times, London, quotes Brian Stout, one of the top fund managers who works for the 1.3 billion Murray International Trust, that Britain would do well to accept that living standards will fall for the next 10 years and policymakers can do precious little about it. Low interest rates and printing money would not drag the developed world out of a downturn which can last another decade, The Times says.

In contrast, India still presents a far better picture, a fact pro-government analysts and policymakers keep referring to. The question, however, is how long it will be before the Indian slowdown becomes a cause for concern? Observers wonder if the wakeup call will come from portfolio investors tiring of policy inaction.