When the FIIs come marching in

Foreign investors are pouring in the moolah, and the trend is here to stay.

At the beginning of the year, foreign fund inflows in the country were negative as January saw an outflow of $482 million (Rs 2,121 crore) and the market mood was sombre as market watchers debated whether foreign investors will continue to prefer India. By June, the current improved marginally but total inflows till then were just about $4.3 billion (Rs 17,630 crore) suggesting that this could be another mediocre year for the inflows.

Then came what appeared like a deluge—July saw the year’s biggest foreign fund inflow of $5.8 billion (Rs 23,200 crore). Foreign investors took a fresh look at the Indian stock market as companies reported bumper results for the first quarter of financial year 2006-07 and the consensus view of the market changed from an also-ran to that of an outperformer.

But when August came around, the US sub-prime mortgage issue threatened to balloon into a global credit crisis and foreign investors withdrew $1.9 billion dollars (Rs 7,790 crore).

But the US Federal Reserve defused the situation with a 50 basis points cut in the lending rate. That move saw foreign investors pouring in more than $2 billion (Rs 8,000 crore)—it added 1,000 points to the Sensex in a week—and taking the total inflows this year to a record $12.2 billion (Rs 48,800 crore) surpassing calendar year 2005 peak.

It’s now raining inflows. Says Andrew Holland, Chief Administrative Officer, EVP DSP Merrill Lynch: “The Fed reduced interest rates and that has freed the credit market and also increased investors’ appetite towards risk marginally.” These days, foreign investors are making net purchases on average of Rs 1,000 crore.

Will they continue to invest? India’s growth story is attracting more new foreign investors—their numbers have doubled in the last four years (see On a Shopping Spree).

They have also upped their stakes in many companies to record highs (see The Toppers List) and also have been big buyers last year (see The Shopping List). For now, market experts opine that over the long-term, India’s growth engine is steaming steadily ahead for foreign investors to ignore.

Launching a new model on the next page...

Launching a New Model

Floating rate car loans have come gliding in. Should you take a ride?

If you are looking for car finance, there’s an added option for buyers: the floating rate. ICICI Bank recently introduced a floating rate product for car buyers—the first of its kind in the country. This product has a lower interest rate of 50 basis points for like-to-like cars (interest rates differ between car models) and the rate will be reviewed every three months. The bank is linking the rate to its floating reference rate (FRR).

With the interest rates on the rise, most car buyers have deferred their plans to buy a car waiting for the rates to come down. Car volumes have been growing on average at around 11-12 per cent.

Says N.R. Narayanan, Head (Auto and Commercial Loans), ICICI Bank: “We want to bring those customers who are waiting for the interest rates to reduce before buying a car.

It’s a solution for them.” A car buyer will gain if the interest rates come down over the tenure of the loan.

But there’s also a risk: interest rates can go up; borrowers will see their monthly installments increase if rates rise.

Floating rates move up or down depending on the interest rate movement in the economy.

Usually this type of loan is available on longer duration loans such as a home loan. But, unlike a home loan, the increase in interest rate will have a higher impact because of the lower duration of the loan.

However, since car loans range between Rs 3 and 8 lakh, unlike a house where the borrowing is larger, car buyers may not see a huge hike in EMIs.

Still, those looking to drive a car should go for the floating rate only if they are comfortable with the risk of a rising interest rate.