The fears thatFIIs will reduce their exposures in emerging markets (like India) haven't materialised. For example, many experts believed that the increase in US interest rates on a regular basis for the past 12 quarters and the poor performance of the foreign hedge funds—which have indirectly invested in Indian stocks—in 2005 will negatively impact foreign inflows. But it hasn't happened. In fact, money is now coming in from new, foreign sources. Last year, huge sums came from Japan, but it was raised from retail investors through dedicated India funds. Even globally, the trend is towards raising money through dedicated India funds. But this year, India is likely to see inflows from Japanese institutional funds too. A number of funds in West Asia too have shown an interest in Indian stocks.
Despite the optimism, a few analysts don't expect the Indian market to do as well as it has in the past 20 months. "At current levels (of the Sensex and the Nifty), we have to bring down the level of aggression," admits Sharekhan's Rahul Rege. The Sensex, which is trading at nearly 18 times earnings, is close to its highest multiple in the past decade and analysts contend that valuations may be overstretched. "In most cases, valuations may not seem to be justified over the short term, ie; keeping the operational numbers for FY '06 and '07 in mind. But as we start introducing 2008 numbers in our calculations, the valuations seem okay," explains Jaiprakash Sinha, V-P (research), Kotak Securities. In fact, his firm has buy recommendations for only 45 per cent of the large-cap stocks it covers, and a hold for 50 per cent. Clearly, cautionary signals are floating in the air on Dalal Street.
