After investing around $8 billion between mid-March and mid-June, foreign institutional investors have started cutting down premiums for the Indian stock markets.
Market experts said the premiums were down from around 15 per cent before the Union Budget last week to 5-7 per cent at present.
"All major FIIs have cut their premiums to the Indian markets. Consequently, the premiums are justified and realistic now," said Pramod Gubbi, director, Nobel, a research house that advises several FIIs.
Long-only FIIs allocate funds for each market, which entails a certain premium, based on growth projections for the year.
Prior to the Budget last week, the markets in India were getting a premium of 15-20 per cent as there were expectations of a clear road map for divestment of public sector units and de-regulation of oil prices.
However, the premium slipped due to lack of a clear message from the government regarding these reforms in the Budget. The rise in the Centre's fiscal deficit to 6.8 per cent of the gross domestic product is another reason for concern. Also, the government announced record borrowings of Rs 4.51 lakh crore (Rs 4.51 trillion) in the Union Budget.
Analysts fear that such a huge borrowing programme will lead to hardening of interest rates. This, in turn, could crowd out the private sector's borrowing and hit balance sheets of companies by raising their cost of borrowing.
However, experts said the premiums could rise again if the reforms agenda continued after the Budget. Rashesh Shah, chairman, Edelweiss Securities, said foreign investors were still willing to pay a premium for the Indian markets on hope that the government would push reforms.
"Even though this will be a short fiscal year after the Budget, it is likely that FIIs could bring in over $10 billion if a clear road map for reforms is worked out.
In that case, premiums could rise above 10 percent," added Shah. In the absence of any major FII action, Shah said the markets could consolidate and stay within a range for a month or two before the next rally.
The Indian markets have risen the fastest in the last few months. Since March, the S&P Nifty has risen 55 per cent. Other emerging markets, including Brazil, Russia and China, gained between 34 per cent and 48 per cent.
