An important feature of the development of the stock market in India, in the last decade and a half, has been the growing participation of Institutional Investors. Both foreign institutional investors (FIIs) and the Indian mutual funds combined together, the total assets under their management amounts to a significant portion of the stock market’s capitalisation.

FIIs have been steadily investing in the Indian market since the advent of liberalisation in 1993. Currently FIIs own a dominant 16% of Indian equities amounting to approximately US$147 billion and account for 10-15% of the equity volumes. (Source: CLSA Asia-Pacific Markets).

While FY08-09 may stand out as an exception to this overall positive trend with investments showing a sharp dip in the last quarter, financial reports reveal that this negative spell was a brief one. The following quarter (Q1 FY09-10) showed that FIIs were back with investment amounting US$ 8.50 billion or 87% of the amount that they had pulled out in the previous quarter. (Source: CLSA Asia-Pacific Markets)

While this certainly proves that both public and private institutions in developed markets are now eying  developing markets like India more favourably, Analyst point out that this trend is driven largely by sound economic fundamentals.

While the upward revision of economic growth from the forecasted 5.8 per cent to 6.1 per cent, along with the  above-expectations  performance of companies in the quarter ended-June 30, may have been the clinching factors, certain proposed changes on the regulatory front also  helped. The Finance Minster tabled before the house a new code for direct taxes, that  promised  savings for  the tax payer’s. Also a trade policy with an ambitious target of US$ 200 billion exports for 2010-11 helped revive the confidence of FIIs investing in India.

Consequently the first six months (April to September) of FY2009-10 saw net FII investment soaring to a record US$ 10 billion. India Brand Equity Foundation sources reveal that a  major portion of these investments have come through the primary market, rather than through buying via secondary markets.

Analysts predict that FIIs will continue to be bullish on India  driven by its economic growth. Deloitte's 2009 Global Venture Capital survey released recently revealed that an impressive 43 per cent of the 725 survey respondents said they expect to increase their investments in India over the next three years.