Net inflows of $1.2 billion into Indian equities in the last two months have taken market participants by surprise. Though market players are celebrating this trend, what is bothering everyone is whether the good times will last.

Nimesh Shah spoke to Devesh Kumar, head of equities at ICICI Securities, about the mood among the company's foreign institutional investor clients.

Excerpts from an interview:

What are the reasons for the strong FII inflows into Indian equities?

FIIs have been bullish on India for the last 18 months. Though election-related concerns had slowed down their investments for two-three months, the present inflows indicate that FIIs are convinced about the continuity of India's economic reform process.

In the current year, except between May and August when inflows dried down a little, FIIs have pumped in huge money into Indian equities. Another reason for the strong FII inflows has been that the corporate results are expected to be robust.

Also, the public issues of TCS and ONGC have forced FIIs to track the Indian markets more seriously.

How do FIIs see the Securities Transaction Tax and the new tax regime?

FIIs have largely welcomed the new tax regime. In fact, the removal of the capital gains tax has addressed the discrimination resulting from the double taxation treaty with a few countries.

The larger funds, looking at investments in India, will find favour with the present tax structure which does not discriminate between the location of a fund.

Even without the STT, FIIs pumped in $10 billion last year. I expect the same trend to continue this year.

Do you think the ongoing rally in mid-cap stocks is sustainable?

With the emergence of a new set of FIIs and hedge funds, a lot of money has flown into non-MSCI index stocks and that supports the ongoing mid-cap rally. But the current quarter results will separate the men from boys.

In India, the large cap universe is small and a minor flow of money creates a big valuation gap between the large cap and mid-cap stocks. With good liquidity, we expect quality mid-cap shares to delight stock pickers.

Are the new set of FIIs recently registered with the Sebi active in Indian equities? Which are the sectors that attract buying interest?

A large number of new FIIs were already in the Indian markets through the p-note/FII sub-account route. They have received good returns and are growing in size as new money is flowing into their funds.

In addition, large US pension funds have also started investing. The large ones are buying into banking, metals, automobiles and technology sectors. The more clued in investors should look at bargains among mid-cap stocks and India plays such as cement.

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