Stocks: Optimism deserves caution

2011 was a bad year for Indian markets - it fell by nearly 25 per cent. And foreign institutional investors, or FIIs, were the last lot interested. Compared to $20.8 billion worth of equity investments FIIs pumped in 2010, they closed 2011 by registering a positive inflow of little below $295 million - a paltry 1.42 per cent in proportion to underline the pain.

But why are you reading the pain of 2011, when the Indian markets have moved into the best performer league - going up by close to 13 per cent in 2012, up to February 2? And also when FIIs have pumped in $2.57 billion in equity in the same period.

The point is that the bulls are not yet driving the Indian markets. Reasons are more than a few. Global macro factors are still playing up negatively with the Eurozone woes far from settling. And back home, inflation remains as an elevated concern for the Reserve Bank of India , which gave growth a pass by cutting cash reserve ratio by 50 basis points and prolonged the wait for the rate reversal cycle to begin.

But then, why FIIs have pumped in an average $112 million per trading day in 2012, so far? First, FIIs turn sellers towards the end of the calendar year for their annual book closure. This leaves FIIs with cash at disposal in the New Year. And the second reason: this time around is the ensuing budget which FIIs expect to be a non-populist one where the government will dust off the policy paralysis and take aggressive steps to bring the economy in order and deficits in control.

So, policy initiatives would be the critical green flags waving at the bulls to rush back into the markets. Until then, let numbers not make us optimists. Cautious optimism would certainly pay.