1128 Words Free Essay on Foreign Investment and Volatile Sensex

Topics: Stock market, Stock, Market capitalization Pages: 3 (1143 words) Published: February 17, 2012
Lately, volatility has come to characterize India's stock markets due to portfolio adjustment made by the Foreign Institutional Investors (FIIs), resulting in destabilizing tendencies in the country's system. This volatility has been visible in the medium and long term as well. From a low of 2924 in April 2003, the BSE Sensitive Index (Sensex) had risen to 6194 in January 2004, only to fall to 4505 in May 2004 and again rise to 6679 in January 2005. While the Sensex crossed 21000 in January 2008, it even witnessed a low of 8000 in September 2008 before climbing to 17000 levels by the end of 2009. These wild fluctuations have meant that for those who bought into the market at the right time and exited at the appropriate moment, the average return earned through capital gains were higher in 2003 than 2004 and 2008-09, despite the extended bull runs in the latter years. Movements in the Sensex during these years have clearly been driven by the behavior of FIIs, who were responsible for net equity purchases. At one level, this influence of the FIIs is puzzling. The cumulative stock of FII investment does not amount much when seen in terms of the percentage of the total market capitalization on the Bombay Stock Exchange. However, FII transactions are significant at the margin. The cumulative turnover by FIIs amounted to a substantial per cent of the total volume of turnover whenever the Sensex sees high volatility. Not surprisingly, there has been a substantial increase in the share of foreign stockholding in leading Indian companies, even exceeding 40 per cent of the total free-floating shares in some of the companies. Such presence of FIIs has given them a considerable role in determining share price movements. Traditionally, Indian stock markets are known to be narrow and shallow in the sense that there are few companies whose shares are actively traded. Thus, though there are nearly 5,000 companies listed on the stock exchange, the BSE Sensex incorporates just 30...
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