The Indian markets are once again the flavour of the season with foreign institutional investors, judging by the money they have pumped in since last month. Between March 22 and 31 they pumped in around $1 billion, after taking $2 billion out of India in the first two months of the year. Whenever FIIs pump in money in a major way, the Sensex and Nifty rise to the occasion. The indices have shot up by over 10 per cent from March 21 till now. Indian market valuations are now attractive, with a 15 per cent-plus correction since December.

Medium and small cap stocks had fallen even more, by around 30-40 per cent, and some frontline stocks were down 25-30 per cent. So there is a good harvest for long-term investors. There are two other pluses — the appreciating rupee and the perennial long-term-growth-story-is-good factor. Even in a worst-case scenario, India’s GDP growth is around 7.5-8 per cent, which is higher than that of any developed country.
Does this mean that scams, inflation, high fiscal deficit and high crude prices, which are negatives for the markets, are a thing of the past? It’s difficult to answer that with a straight “yes” or “no”. The scams were indeed a disincentive for FIIs, particularly as they coincided with the growing turnaround of the American economy in the later months of 2010, and it appeared more attractive for the FIIs to invest in North America than in India. Besides, the markets here had run up at a sorching pace in 2010, making stocks expensive. Inflation and high fiscal deficit are still around, though finance minister Pranab Mukherjee has made a strong commitment in the Budget to lower the fiscal deficit. High inflation is still the most worrying factor, now aggravated by rising crude prices. Brent crude has inched up to $122.39 per barrel. The fact that India needs to import almost 75 per cent of its fuel requirement is a major worry. This has increased due to private sector giant Reliance Industries’ inability to meet 2012 oil production target due to technical reasons. If the Cairn plc-Vedanta deal goes through, perhaps Vedanta might be able to increase output from the Cairn oilfields, which have seen good production.
The petroleum ministry has already said it will discuss with the finance minister next week the question of increased support from the government to cushion the gap between what oil companies pay for crude and the price at which they sell it to consumers. This could put pressure on the fiscal deficit. If inflation remains high, interest rates will also continue to be high and this works to the disadvantage of India Inc. It also means less investment, leading to a vicious circle of high inflation, high interest rates, low investment and slower growth. Reserve Bank deputy governor Subir Gokarn has pointed out that high inflation poses a risk to faster growth in the future. That is why the RBI is concentrating on taming inflation. High interest rates, he noted, is that sacrifice that India Inc and other borrowers must make to ensure faster growth in future. These challenges are also expected as part of any growth process, and nothing that the government can’t handle if it decides to get its act together. It is now battling on several fronts — from corruption to elections in four states and a Union territory. One hopes that as soon as these elections are out of the way, the government will get down to the serious business of governance. Thankfully India, for now, is an attractive investment destination and FIIs will continue to pump in their dollars.