Will Indian stocks see more foreign buyers? The world’s largest pension fund—the California Public Employees’ Retirement System (Calpers)—has added India to its list of allowable investment markets. Calpers’ decision is seen as a vote of confidence in the structural reforms that have made India one of Asia’s most efficient stock markets.

Calpers has $166 billion under management, of which only $2 billion is invested in emerging market assets. With its entry into India, Calpers is now likely to apply its tough standards on corporate governance. Just two months ago, India had failed to make it into the Calpers’ investable emerging equity markets list, but with India announcing its decision to move into new global standards for trade settlement, Calpers reversed its earlier decision. This effectively means that Indian stock markets will have to move to the T+1 settlement cycle as per the proposed schedule on July 1, 2004.

The new trade settlement in the Indian stock market will be quicker than transactions in Hong Kong and New York.

The coming of Calpers’ to India is not only a reflection of the big appetite for the Indian markets but also an indication of the market efficiency, corporate governance practices, transparency, and political stability.
And the bottom line is: the Indian market has the potential to give back very high returns.

The entry of Calpers into any country usually serves as a good pointer for other international investors. This only means that it is likely to spur more foreign stock buying in the emerging markets. Fund managers in India believe that Calpers’ entry would send out the right signals to the retirement funds segment abroad and it would open the floodgates for other such funds to follow.

In fact there is already strong capital flows into the country. This year, foreigners have bought a net $3.8b of Indian securities, maintaining the pattern of 2003 when a record $7b flowed into India and equity prices rose some 70 per cent. Market watchers say India could attract $10b in foreign portfolio investment by end of this year.

“Calpers’ move is a sign of a change in the road map for global funds in terms of risk and reward,” says Jon Thorn of the India Capital Fund in Hong Kong.