India as ATM: Do foreign funds drive India’s market swings?

India is, indeed, one big ATM for foreign institutional investors, it appears, as the Daily Mail trumpets, “Goodbye, Naysayers: Markets on fire.”

Undeniable, I guess. But the important footnote was the one that said so-called “foreign institutional investors” — read: big banks and mutual funds — “pumped in $1.5 billion” so far in January. (Unless the guy who lays out the Mail's front page will supply details of his portfolio).

What do I mean? Well, put your Christmas money in an Indian index fund next year, and see.

It turns out, according to India's Business Today magazine: "The answer, as Ajay Parmar, head of institutional research, Emkay Global Financial Services, puts it, is simple, 'Indian markets are primarily driven by FII fund flows.'"

Consider what happened this year-end. As usual, as the end of 2011 approached, the Indian newspapers discussed it as if it were the End of Days. The rupee was plunging. Inflation was skyrocketing. The government was stagnating. The India story was over. And so on.

But the real news – if you knew how to read it – was a phrase that winds up somewhere in virtually every report about the see-saws of the Bombay Stock Exchange's (BSE) benchmark Sensex: The market tanked in 2011 on a massive pullout of funds by Foreign Institutional Investors (FIIs). (That's big US banks & mutual fund houses, to you folks).

At the time, I speculated, as I am known to do after downing a few beers, that FIIs invest enough money in India and command enough influence that they're actually able to swing the market. Of course, we know that certain analysts and commentators are notorious bulls or bears, and they try to move markets with their comments.

It may be a simple coincidence. The FII's $1.5 billion amounts to less than 1 percent of the total $1 trillion capitalization of the BSE. However, it certainly seems that the Sensex closely follows the FII moves, especially when the year-end “profit taking” begins. And assuming (for simplicity) that the FIIs whacked that money in on Jan. 2, they've made a neat 8 percent already this year.

(INTERLUDE of furious web searching and — OMG! — MATH)

I've spent altogether too much time looking at the historical Sensex data just now, only to discover that it will take a lot of number crunching (and perhaps some creative spinning) to support my case. Meanwhile, analysts warn that guys like you and me shouldn't try to follow these day-to-day fluctuations – just whack our money into a fund and let somebody else do it. And, frankly, that's exactly what I do.

But, nevertheless, it certainly seems SOMEBODY is chasing that mugs' money (as they say at the racetrack).