FII inflow is not strongly correlated to Sensex returns in the short run

A report released by Morgan Stanley Research (Asia/Pac) states that volatility could increase going forward and also analyses the correlation between Sensex and FII flows

Morgan Stanley Research (Morgan Stanley) has released a report titled “India Strategy: Elevated Importance of FII Flows”, wherein they found that the correlation between short-term returns and FIIs flows were weak and was strong only in case of long-term returns (i.e. 12 months). It warned investors to“not assume that FII flows will lead to a higher Sensex and vice versa.”


FII flows is one of the key indicators in measuring market direction and movement, as India, at the moment, is heavily driven by foreign funds, especially routed through offshore funds. The report delved into the relationship between Sensex and FII flows vis-a-vis Beta and Correlation measurements, Morgan Stanley said.


The investment bank research arm notes that the beta of Sensex has indeed risen, and continues to do so, particularly due to the strong (long-term) correlation coefficient between Sensex and FII flows rather than underlying volatility. Beta measures how strongly two variables, in this case—Sensex and FII flows—are related. A high beta would mean that FII flows would mean a higher degree of direct proportionality to each other. The report noted, “While the economy and the markets got a substantial lift from global factors between 2003 and 2007, the beta of the market to flows was not as high as we have seen since 2008. The credit crisis and the ensuing policy lethargy explain the rising beta of Sensex moves to FII flows.”


Morgan Stanley also expects that volatility could rise as the current levels of Sensex volatility are low. It cited mean reversion as the key reason why it would increase. The report said, “absolute volatility of both Sensex returns and Foreign Institutional Investors (FIIs) flows is low. Volatility tends to be mean reverting so if anything, it tells us that volatility could rise in the coming months.” And since volatility was low and below historical average, Morgan Stanley cited that it could “revert to mean” and thus see increased volatility in the coming months.


However, the report did not mention what the mean volatility was and how far the current levels were below the mean. It also cited that the key driver for increase in volatility is likely to be affected by global factors rather than local ones.


RBI snubs SBI chief on CRR comments

In a sharp reaction to SBI chief Chaudhuri's recent comment that CRR does not help anybody and it was unfairly put on banks, Dr Chakrabarty said, it he is not able to do business as per RBI's regulatory environment, he has to find some other place

Kancheepuram (Tamil Nadu): A top official from the Reserve Bank of India (RBI) on Monday snubbed State Bank of India (SBI) Chairman Pratip K Chaudhuri for his remarks suggesting abolition of cash reserve ratio (CRR), bluntly telling him that he has to find 'some other place' if he could not work as per the central bank's regulatory environment, reports PTI.


"...if the SBI Chairman is not able to do business as per our regulatory environment, he has to find some other place," RBI Deputy Governor KC Chakrabarty said in a sharp reaction to Chaudhuri's recent comment that CRR does not help anybody and it was unfairly put on banks.


Chakrabarty was responding to a question by a student of Great Lakes Institute of Management during its third annual financial conference "Systemic Risk".


To another query as to "which banking tree needed to be protected", Dr Chakrabarty, drawing an analogy to forest fire, said: "Obviously it is the SBI. SBI is too big a tree. If you fail to protect SBI tree, it (the fire) may spread on to other banks and it will turn out to be a systemic failure."


Chaudhuri had questioned why the CRR was not applied to insurance companies, non-banking financial companies and mutual funds, who are also mobilising public deposits.


"CRR doesn't help anybody and it is unfairly put on the banks," the chief of the country's largest public sector State Bank of India had said last week.


Keeping required funds with the Reserve Bank without any interest was costing the banking system about Rs 21,000 crore, Chaudhuri had said. CRR is the amount of deposits banks keep with RBI in cash.


In its quarterly monetary policy review, RBI had last month retained the CRR at 4.75% and reduced the statutory liquidity ratio (SLR) -- the amount of deposits banks park in government bonds -- by 1% to 23%, effective 11th August.


It had also left key interest rates untouched, a move that disappointed industry and retail borrowers.




5 years ago

It is unfortunate that the men at the top of two institutions expressed their views in a way that is not very comfortable for a healthy debate on an issue which deserves convincing reasons/arguments from either side to be put forth. While RBI has the right to have its perceptions, the grace of the organisation should be preserved while making public comments.

nagesh kini

5 years ago

If not abolishing , at least pay a decent interest on the impounded amounts!

Ramesh Poapt

5 years ago

Mr Chaudhary, uncomfortable by high NPA of SBI, frequently passes comments on RBI policy matters.Mr Chakrabarty responded-as usual- acidly in the matter of CRR. No CMD/CM talk like SBI,s.Perhaps there is some 'strong backing'behind the screen for such comments from Mr.Chaudhury. Mr chakrabarty's forest fire/SBI comment is very meaningfull!

Law should draw a line between independent and executive directors

Though independent directors are equally liable for both financial and criminal liabilities, the Companies Act gives a lesser immunity to IDs as against the EDs, says a report

Mumbai: The law should clearly demarcate the line between independent directors (IDs) and executive directors (EDs) by defining their functional responsibilities along with liabilities, reports PTI quoting a research note.


Ernst & Young (E&Y) Fraud Investigation and Dispute Services (FIDS) in a report, 'Corporate governance: Changing regulatory scenario and the role of the independent directors', said "The need of the hour is for the legislature to draw a line between IDs and EDs by defining their functional responsibilities, and demarcating their liabilities."


According to the report, the Companies Act, 1956 does not make distinction between the accountability of independent directors and executive directors.


Though independent directors are equally liable for both financial and criminal liabilities, the Companies Act gives a lesser immunity to IDs as against the EDs, it said.


Commenting on the report, partner & national director, FIDS of Ernst & Young India, Arpinder Singh said, "The role of IDs in fraud prevention and detection has come under the direct scanner of regulators, members and other stakeholders due to the recent exposure of high-profile instances of fraud in India. In the last few months, we can clearly see IDs taking direct interest in reviewing the fraud risk management framework put in place by their organisations for mitigating the risk of fraud."


Singh also pointed out that with the rise in number of multinational companies, the trend is positive as they are devising fraud management mechanism along with proactive role of IDs.


The E&Y report also noted that the proposed Companies Bill, 2011, which has already received cabinet nod and is awaiting approval from the Parliament, would be able to deter corporate crime and related offences by detailing the liabilities of the board and senior management.


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