WHY FOREIGN INSTITUTIONAL INVESTORS WANT TO INVEST IN INDIA ?

Friday, November 13, 2009

Affluent countries have an abundance of surplus capital, a natural consequence of prosperity. As countries get more and more prosperous, their markets get saturated and the demand for capital diminishes. As a result, supply of capital exceeds demand and capital therefore tends to fetch very low returns.

In under-developed and developing countries there is a dearth of capital. As a result, the supply of available capital falls far short of the demand and capital thus fetches a very high return. developing countries have a huge potential for growth and a large pent-up demand for goods and services. When inter-country barriers and restrictions on the movement of capital are removed, or eased, then capital tends to flow from the affluent to developing countries so that it can earn higher returns. These capital flows can be in the form of loans, direct physical investments or portfolio investments.

Under normal circumstances, a major chunk of surplus capital of USA, Western Europe and Japan would have flowed to China and Russia. But these countries doesn't have have developed stock markets and therefore cannot absorb large foreign portfolio investments. These regions will no doubt, attract heavy capital inflows in the form of loans and direct physical investments, but the major chunk of foreign funds earmarked for overseas portfolio investments will eventually find its way to the Indian stock market. The Indian stock market offers really viable and practical option for portfolio investments to foreign fund managers. the major stock market boom in India will,in all likelihoo, be fuelled by foreign institutional investors.