Having showered $8 billion on the Indian equity markets this year, foreign institutional investors cannot by any stretch of the imagination be seen as merely testing the waters. Especially since this $8 billion comes on top of the $9.949 billion in 2003.

Venkatesh S, research head at investment bank JP Morgan India, says the FIIs are here for two reasons. One, they are beginning to buy more parts of the India story: the secular rise in domestic consumption, the progress (if plodding) in commitment to structural reforms, the growing global competitiveness of several manufacturing and service companies, ranging from IT and pharmaceuticals to automobile components, and, of course, the abolition of long-term capital gains tax in the last Budget.

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Two, the FIIs are positive on many emerging markets, including South Africa, Brazil, South Korea and Taiwan. "FII interest has been high in all emerging markets with economic growth and reflation stories," says Venkatesh.

This pull of the emerging markets is being accentuated by the push away from developed markets, especially the US, with its weakening currency.

Says Ajay Srinivasan, chief executive (fund management) at Prudential Corporation Asia, "There has been an increase in (FII) flows, driven by the weakness in the US dollar and expectations of a strengthening of Asian currencies."

Nishid Shah, chief information officer, Birla Sun Life Mutual Fund, emphasises that at this point in time the FIIs are actually buying Indian equity at the same dollar prices as in 1994, owing to the rupee's steady depreciation till 2003.

The recent strength of the rupee offers them an opportunity for reaping double benefits: an exit from declining dollar assets into appreciating rupee assets.

Nikhil Johri, chief operating officer, ABN Amro Mutual Fund, agrees. "There is a desire to diversify from US assets in view of the weakening dollar and uncertainty over the strength of the US economy in the light of record current account deficits," he says.

Ajay Bagga, CEO, Kotak Mutual, says money is also flowing in from other areas of the world. "Oil money from the Gulf is looking for investment avenues beyond the traditional safe haven in the US," he says.

In a fundamental sense, foreign investors have turned questions about India on their head. If earlier they used to ask themselves, "Is it worth investing in India?" Now it is the other way around: "Can we risk putting all our eggs in slow-growing developed markets and ignore a booming economy like India?"

Says Raamdeo Agrawal, joint managing director, Motilal Oswal Securities, "My sense is they (the FIIs) are buying emerging markets in general, but India is the fastest growing economy and rather under-allocated (in terms of share of investments)."

Gurunath Mudlapur, head of research at Khandwala Securities, would second that. "FIIs are buying into Indian equities for many reasons. One of them is the lack of attractive risk opportunities in developed economies and the need to diversify into growth markets," he says.

But this is an argument that could turn the other way if the mood changes.

According to Sanjay Prakash, "Relative valuations are very important. If the valuations in India start to look less attractive than in other emerging markets and if the dollar strengthens, there will be a realignment of inflows to India."

Prakash adds: "Another possible negative for the market would be political developments that could impact economic decision making. Oil is, of course, a major worry and any major flare-up in prices will distort fundamentals."

In the short run, though, there are good reasons why the FIIs are still piling into Indian stocks. (They have invested over $718 million in the equity markets in the first six trading days of December alone.) Bagga believes this could be in anticipation of next year's FII allocations.

"For a lot of FIIs, next year's allocations depend on current exposures to various markets. Hence, there could be a move to raise the Indian market exposure before the year-end. Another reason could be the high probability of India's weight being increased in the Morgan Stanley Capital Markets index (a benchmark widely used by fund managers to allocate funds to various emerging markets)," he says.

Devesh Kumar, head of equities at ICICI Securities, says India is not a part of many other emerging market indices. "As the country gets included in other emerging market indices, the flow of funds is likely to increase significantly," he says.

"In addition, as the multiplier effect of telecom and highway investment starts unfolding, GDP growth could move into double digits," Kumar says.