India’s stock market was in an extraordinary boom. The Sensex has shot up almost seven fold from the 2000’s to 14,000 within less than five years. It has delivered super profits to FIIS. The net FII investment of $50 billion, in Indian stock does not give the full picture. This is because there is a considerable churning happening through average sales and purchases, of the order of Rs.1,000 – 1,500 crore a day. The liquidity of the Indian Stock market is good enough to absorb such high volumes of FII activity. Also, the foreign investors are booking profits at every opportunity.
The investment of FII’S, constitute borrowing. It flows into the stock market and add’s to the forex reserves. The higher the rate of profit, the higher is the effective rate of interest paid on the borrowing. In reality, the emerging market risk is extremely low.
I would like to further add here by saying that the risk- reward ratio is overwhelmingly in favor of emerging markets. Also, it is a matter of concern when we offer such “excess” returns to foreign investors, that too tax-free. With juicy returns, it is obvious that FIIs will not turn away from India, even if their profits are taxed. A 10 per cent tax would reduce a 30 per cent return. The Finance Minister can easily earn from the source of Rs.5,000 to Rs.10,000 crore annually. This will ease his budgetary woes and it will create more resources for welfare spending.