Foreign institutional investors have become the lifeline of Indian stock market as is indicated by a whopping 1,635 per cent or a 17-time increase in FII inflows during 2003-04, the Economic Survey said on Wednesday.

Net FII inflows, both debt and equity, rose to Rs 48,968 crore (Rs 489.68 billion) in the last fiscal from a meagre Rs 2,822 crore (Rs 28.22 billion) in 2002-03, the pre-budget Economic Survey, tabled in Parliament, said.

Net FII investments are shaped by expectations from Indian equity and the Indian rupee, as also strong global investment flows into 'emerging markets' which saw offshore primary market issuance going up from Rs 910 crore (Rs 9.10 billion) in 2002-03 to Rs 3,746 crore (Rs 37.46 billion)in 2003-04.

• Economic Survey 2003-2004: Complete Coverage

The Survey, however, pointed out "these expectations changed in May this year, and the largest ever one-month exit -- of Rs 3,507 crore (Rs 35.07 billion) -- by foreign investors took place."

Even as the Survey was silent on the steps required to provide a healthy stock market as promised in the Common Minimum Programme of the new government, it said: "Securities markets have made enormous progress in recent years and it is now being increasingly recognised as a success story on the world scale."

It also highlighted the role of mutual fund industry in the overall growth of stock market. Overall Assets Under Management (AUM) grew from Rs 102,831 crore (Rs 1,028.31 billion) to Rs 143,688 crore (Rs 1,436.88 billion) in 2004, it added.

As far as the market size is concerned, the equity market capitalisation grew by nearly 90 per cent to Rs 13.77 trillion in March 2004, up from Rs 7.25 trillion in March 2003.

"This value was roughly of the same size as bank deposits suggesting that in 2003-04, the equity market was as big as the banking system in terms of financial intermediation," the Survey said.

In terms of US dollar, the equity market capitalization worked out to $310 billion making India one of the bigger equity markets in the developing world.

With regard to increased level of volatility in the Indian stock markets, the Survey pointed out that Indian equities have co-movement with equity markets outside the country.

Equity volatility has been low in the recent period, when compared with India's longer experience, it said, adding that 2003-04 was a more volatile year than 2002-03 on both equity and currency markets.

"India's deepening globalisation is leading to higher correlations between Indian equity indexes and world markets," the Survey said, adding that these correlations, however, are as yet small, and there were considerable gains from diversification for global portfolios that harness Indian equity indexes."