Foreign investors seem to have embraced Indian stocks yet again with net inflows crossing Rs 1.2 lakh crore ($23 billion) in 2012 and taking their total cumulative investment in the country's equity market to an all-time high of $125 billion.
The net inflow of Rs 1.23 lakh crore during 2012 is the second-highest for a year and comes after a net outflow in the previous year 2011-- preparing the ground for even better times ahead in 2013 on the back of continuing reform-push by the government and market regulator Sebi.
At gross level, Foreign Institutional Investors (FIIs) purchased stocks worth about Rs 6.5 lakh crore in 2012 and sold equities to the tune of Rs 5.3 lakh crore -- translating into a net inflow of Rs 1,21,652 crore ($23 billion).
This was the second highest net inflow by FIIs in a single calendar year since their entry into Indian capital markets in 1992. In 2010, overseas investors had made a record Rs 1.33 lakh crore ($29 billion) net investment into the share market.
However, FIIs had pulled out a net Rs 2,714 crore ($358 million) from the share market in 2011.
Despite their unpredictable 'hot money' investment, these overseas entities have been amongst the most important drivers of Indian stock markets.
The huge inflows came despite the number of FIIs registered in India dipping to 1,755 this year from 1,767 at the end of 2011.
Market experts believe the recent reforms initiatives undertaken by the government to boost economic growth and investor sentiment have led to a renewed interest among the foreign investors.
"FIIs pumped in capital into the Indian equities as the lack of investment options make the country an attractive destination. Indian market has attracted the highest amount of foreign flows compared with Asian peers so far in 2012," Destimoney Securities Sudip Bandhopadhyay said.
CNI Research's CMD Kishor Ostwal said, "India has had an excellent year so far after a disastrous 2011. I think Indian valuations look cheaper compared to historical average."
This is the second time in history that net FII inflows for a year have crossed the Rs 1 lakh crore mark and analysts are optimistic about the next year.
Moreover, FIIs were also seen pouring money in the debt market and infused Rs 33,777 crore ($6.4 billion) during the year in the segment.
Since opening up of Indian markets for FIIs in 1992, they have made a cumulative net investment of Rs 5.67 lakh crore ($125 billion) in shares and Rs 1.55 lakh crore ($32 billion) in the debt segment.
After a disastrous 2011, FIIs began 2012 on a positive note and infused more than Rs 36,000 crore in the first two months, as the Reserve Bank paused in rate hikes that improved liquidity position.
But foreign investors turned negative after government's anti-tax avoidance rule (GAAR) proposal announced early this year that led to continued outflow till June.
Market experts attributed the outflow to a host of factors including the GAAR proposal and ratings agency S&P's move to lower India's outlook to negative from stable, citing slow progress on its fiscal situation and deteriorating economic situation.
Overseas investors once again started pouring funds in the stock market in July and the pace of inflows increased in September after a slew of reforms initiated by the government. These measures made it easier for foreign companies to invest in aviation, broadcast and retail companies.
According to investment banking major Morgan Stanley, FIIs have preferred bigger stocks as their aggregate holding in the country's top 75 companies rose to a six-year high level of 21.6 per cent in the July-September quarter.
Positive measures taken by the government also helped attract FIIs, which in turn helped the market benchmark Sensex soar by about 25 per cent in 2012.
Asked about the new year, Bandhopadhyay said, "The situation seems to be more promising on the international front compared to the domestic. European market is stabilising and the global energy prices seems to be going in favour of countries which import oil including India."
"However, there are concerns on the domestic side-- economic growth has been now growing at sub six per cent for the last two-three quarters, inflation has been hovering above seven per cent for quite a while and fiscal and current account deficit continue to be high.
"But we are still better off than other economies across the globe, which raises optimism of more FII flows into the country," he added.
As per Sebi data, the total number of registered FIIs dropped to 1,755 as on December 21, first decline in five years. This number has been rising continuously since the end of 2007, when there were a total of 1,219 registered FIIs in the country.
At the end of 2010, there were 1,718 registered FIIs, which came down to 1700 at the end of the previous year.
However, the number of FII sub-accounts has risen to 6,350, from 6,278 at the end of 2011. The sub-accounts include foreign firms, individuals and institutions on whose behalf FIIs make those investments. The rate of growth in their numbers has, however, grown at a slower pace in 2012.