To understand the currents that drive the Indian stock markets, and to attempt a future forecast, a study into the class of investors as well as the drivers for such investment should be attempted. Broadly speaking, we can make out three different categories of investors.

The FIIs, Indian institutional and corporate investors, and the non-institutional investors. Of these three classes, the FIIs have in recent times been consistent in their quantum, and in fact have been hiking their monthly investments.

They have their own reasons, which are more or less clear to most by now. The Indian non-institutional investor has indeed to be classified into two different categories. The one who invests for medium-to long-term and the other, the short-term trader.

Judging by the turnover and delivery volumes, it is quite clear that more than 85 per cent of the turnover is accounted for by the select scrips in A group. Now, you factor in the volume of funds being brought in by FIIs, and it would become clear that speculative volumes are one of the two major drivers of the market today.

The other driver is the consistent investment by FIIs. In fact, these two operate in synergy.

The other fundamental driver has been the attractiveness of the Indian stock markets. I have chosen dates which mark crucial points in the Indian stock market (see table).

These figures reveal that the market gave three opportunities of over 40 per cent swing in the period shown above. What is more, these gains were spread through to the National and BSE 200 indices.

Nevertheless, there may be more research needed here to see if the gains were spread evenly through all the index stocks. Given the above picture, it is not surprising that FIIs are attracted to the Indian market.

But for any equity market to be well sustained, it is important that the retail investor participates. Now, who is the retail investor? The retail investor two years back was the common man, who poured over Rs 28,000 crore of his savings for two years in primary issues. Where is he now and what has happened to his stocks? Has he converted himself to a speculator, thanks to the thousands of NSE terminals?

The common investor is still suffering from the trauma of seeing his scrips quoting at Re 1 or even below. More shockingly, nobody cares about him. Perhaps nobody did since the changeover from CCI to SEBI.

SEBI, I believe, has as one of its objectives - the promotion of equity culture. I wonder if SEBI did justice to that by just framing up some rules of disclosures and its own notice of `Buyer Beware' for IPOs.

It is a pity that SEBI busied itself with the framing and execution of some quixotic rules without digging deeper into public or national interest.

If it had done that, we would not have thousands of IPOs hoisted on the unsuspecting public, who have natural limitations of evaluating, by merchant bankers and promoters, who have not been able to keep their promise in such a large measure. Can SEBI absolve itself of this debacle? The new class of retail investors is the speculator, so it would seem.

Now let me get back to my central theme. How would these classes of investors affect the future course of the market.

The FIIs continue to invest because for them it is a trade-off between returns and opportunities available.

With not too many alternatives, they would plug in for whatever returns upwards of 15 per cent per annum they can get. That would mean exhausting the market potential by investing now at higher and higher values. The market has recorded a gain of 12-16 per cent between May and July in contrast to a gain of around 45 per cent from the previous market bottom.

It is a well accepted maxim that the market precedes economic recovery. Now you factor in the potential 25 per cent profit growth and discount it for the international PE ratios.

You are looking at the Sensex at 5,000 levels in a year from now. That would mean the future opportunities and returns are getting crushed. If that is the case, one should expect the market to stay more or less flat. More likely, as more money chases less stocks, the market will go up with volatile retractions.

Also, FIIs may start getting into second line stocks. And that should be a welcome change.

Maybe it is time Indian broking houses and investors perk up and take careful stock of the opportunities.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.