New Year starts with a bang as FIIs invest $1 bn in equities

This year seems to have begun with a bang as foreign investors pumped in nearly $1 billion in equity markets in the past 14 trading sessions, according to report on CNBC TV-18.

While this certainly indicates the return of risk appetite among global investors, a large part of this is due to easing concerns over inflation and economic growth.

As a result of foreign fund inflows, the rupee has also strengthened.

A lot still depends on how inflation behaves: if it were to stay around 7 percent by March, it would give the Reserve Bank of India more headroom to cut interest rates.

“We believe that the interest rate cycle has reached its peak and we could possibly see easing from the RBI over the next few months,” said Ayaz Ebrahim, chief investment officer, Asian Equities (excluding Japan).

He also said his company had become a little more ‘constructive’ on India as valuations are looking better from a price-to-earnings ratio.

The start of foreign investment interest could also be seen the in shareholding pattern of domestic companies in the quarter ending December.

One hundred and twenty-eight companies reported an increase in their shareholding pattern, according to data compiled by Ace Equity. (For our analysis, we have only considered companies on the BSE 500 whose shareholding pattern is available for the quarter ending December 2011 so far).

Patni Computers, Voltamp Transformers and IRB Infrastructure reported an increase of 4 percentage points or more in foreign investor holdings for the three months ending December (see table).

However, this doesn’t mean there won’t be hiccups ahead. Low trading volumes and an unresolved eurozone crisis continues to keep investors on edge.

“In the worst case scenario….one could argue a Sensex target of 12,000 on the downside” said Andrew Holland, CEO Equities, Ambit Capital, to CNBC TV-18.

Watch the video below.