Even the Reserve Bank of India (RBI) is wary. The sudden rush of dollars, considered 'hot money' by old-school economists, is pushing Rupee upward. This will affect Indian industry, especially the export sector, including IT and software services, which are already facing President Barack Obama's anti-outsourcing jibe. RBI's direct purchase of US Dollars in the open market will mean Rupee (INR) expansion resulting in further domestic inflation. The steady fund flow from foreign financial institutions (FIIs) in the secondary market may be good news for those companies itching to float initial public offerings (IPOs), the trend has a potential to unsettle Indian economy. FII fund flow is fast outsmarting FDI inflow. There is little to cheer about the Sensex topping the 20K mark.

What is intriguing is that FIIs' renewed enthusiasm about the Indian stock market ignores the basic business and economic fundamentals. The high inflation rate has been overshadowing India's current 8 per cent GDP growth rate. The delayed and uneven monsoon threatens to affect agricultural production for the third successive year. Food prices are ruling at record high levels. This month, the government has been forced to raise the dearness allowance (DA) for its employees and pensioners by 10 per cent, taking an extra-Rs.1,000 crore-plus blow on the expenditure budget. On the other hand, RBI has further tightened the money supply with the public (M3) through upward adjustments of repo and reverse repo rates. India's foreign trade in the last five months (April-August) showed the most alarming trade deficit ever at US$ 56 billion. India is borrowing money left, right and centre from overseas sources. It has earned a dubious distinction of being one of the world's top debtor nations. The country's external borrowing reached a record high at US$ 261.5 billion at the end of March, 2010, a 16.5 per cent jump over the corresponding period last year.

Interestingly, foreign fund flow into the secondary market is taking place more in technology, Banking and infrastructure shares than those in brick and mortar enterprises and mid-cap stocks. Shares of as many as 15 companies out of the 30-firm index performed well below the average earnings (PE) ratio of Sensex as of September 21. These lower performing stocks include Reliance Industries (RIL), despite oil price deregulation, ONGC, SBI, Tata Motors, Mahindra & Mahindra, Jindal Steel, Hindalco, Sterlite Industries, Tata Power, Maruti Suzuki, NTPC, Hero Honda, Bharti Airtel, Reliance Communications and ACC. The most sought after scrips were Larsen & Toubro, HDFC, HDFC Bank, ICICI Bank, DLF, BHEL, Hindustan Unilever, ITC, Infosys and TCS. Among the non-Sensex companies, Reliance Power and Reliance Capital, both Anil Ambani group companies, Cairn, a Vedanta take-over target, ABB, Siemens have been speculators' target for quite some time. The shares of these five companies far outstrip the earnings ratio (25.37) of the national stock exchange's 50-share index (Nifty).

While it is difficult to guess the reasons or, to put it more bluntly, the hidden agenda behind the FIIs' bull run of the market, the trend, if continues, should make the union finance ministry, RBI and SEBI reexamine the regulatory framework to control the inflow of hot money for the country's future financial security. These government institutions should also go deep into the issue of identifying the real sources of these funds. It is a common knowledge that huge amounts of India originated funds are illegally held abroad and they are finding ways to enter the stock market through the foreign fund managers. Some of them are also hedge funds, including those from international terrorist organizations. It would be foolish to welcome such fund flows beyond a point which the market can absorb. Such funds have capacity to rock any economy having weak fundamentals. The GDP growth is no indicator of the basic strength of an economy. The availability of food and energy, industrial and social infrastructure facilities, the availability of strategic industrial raw materials, outcome of international trade (BoT) and receivables (BoP) data, the state of internal and external security, political stability and performance of the government of a country, need to be weighed alongside its GDP growth statistics for a proper evaluation of the strength of an economy.

Going by such an evaluation regime, India can hardly be regarded as a hot spot destination of global funds worth tens of billions of dollars in its tiny stock market. Of some 4,000 active stocks in BSE and NSE, only 25 per cent deserve a second look. Thanks to liberal government policies, most large foreign companies in India operate as private limited companies. Several foreign companies, which have been operating in India for half a century or more as public companies, have been allowed to buy back their shares and get delisted with the local stock exchange. Today, only a very few operating foreign companies are listed in India. Why are FIIs so very speculative about India's tiny secondary market, led by family controlled enterprises, which does not even feature in the Asian stock market list? This is a question our market regulators such as SEBI and RBI must answer. The RBI's investigation wing with its foreign exchange division must find out the real sources of the institutional funds, which are currently in total control of the Indian stock market.

Indian market analysts, who have ready 'sentimental' answers to all daily stock price movement puzzles, say the current stock price spurt signifies good investor 'sentiment' and support in terms of the mid-term picture of the economy after the release of the first quarter GDP numbers. Their comments are music to the ears of the government, which spared no time to take credit on the Sensex jump. But, the real story could be different. One would like to know how much of the GDP growth is actually on account of India's US$ 56-billion trade deficit that bolstered the financial fortune of domestic import trade selling luxury consumer products from China, Taiwan, Singapore and South Korea, from digital camera, BlackBerry handset, LCD TV, i-pod, i-phone, accessories, the latest Apple touch-pad, etc. to home appliances and decors to cater to the country's 200-million-plus nouveau riche, the wannabes who want everything. The import trade is adding to the local as well as national income and computed in the making of the country's GDP although the items are produced elsewhere. Whose GDP growth is fuelling India's stock prices - its own or its trade partners? Why are stocks of India's energy companies not on the radar of foreign fund investors despite the latest International Energy Commission (IEA) report that 40.40 crore Indians have no direct access to electricity? The latest market developments should serve as a wake-up call for both SEBI and RBI. (IPA Service)