The quantity of inflow in the long term would depend on how many funds and investors are able to register themselves as FIIs. “The number of investors and funds seeking registration would go up. Tighter controls on P-Notes, coupled with surge in FII registrations, will improve disclosure and transparency in the Indian market,” said Jain.

Is there a stock-market bubble in India which trades at over 22 times forward earnings? For example, is Reliance at 27x a bubble?

“It’s expensive yes, but their execution has been so good, and their cash flow is huge. A bubble is when a company that doesn’t make any money, trades at ridiculous valuations. Reliance has cash flow of $4.3 billion this year,” Merrill Lynch says.

Who will invest in the Indian market in coming years?

There are many waiting in the wings. For example, pension funds and insurance companies, which have traditionally hugged benchmarks, have missed out on the Asian markets, including India, so far this decade. At the same time, they have faced diminishing returns elsewhere.

“In an attempt to boost their returns, they have gravitated toward hedge funds. But investing in them is not without issues. Performance fee is high, and NAVs are not published on a regular basis. Now pension funds and insurance companies are getting interested, and looking for other vehicles to invest,” said a foreign investment firm.

Having said that, the rising inflows could pose problems on the liquidity management front. This means the regulators and the government would have to devise more mechanisms to absorb the flows. Slapping controls should be the last option. In this globalised era, foreign investors will go to a country where they can move funds without facing curbs, and make decent returns.

... contd.