Until recently, Indian equities witnessed brutal selloff by foreign institutional investors (FIIs) amid global economic concerns. Things got better with the return of FIIs in July. Even in the month of August so far, FIIs have been net buyers of Indian stocks.
FII selling has been a part of the story of the Indian stock market. However, for some time now, the dynamics between the major Indian benchmark index Nifty and foreign fund inflows have changed dramatically, due to heavy volatility by domestic institutional investors (DIIs).
see full image
According to an analysis by Motilal Oswal Financial Services Ltd, FII inflows and returns of Nifty 50 had a strong positive correlation in the past, which has reversed in the last two years. As the accompanying chart shows, despite FII selling spree, the Nifty 50 index has not seen a decline in FY22 and FY23 so far. This was not always the case before.
Fortunately for India, the outlook on FII inflows is getting brighter. “A major part of the hike in interest rates in India has already happened. Also, the worst inflation is expected to be behind us. Aishwarya Dadhich, director and fund manager, Ambit Asset Management, said, “These factors are driving the shift in FII flows.
However, Indian stocks are not cheap. In fact, India is trading at a premium to its Asian peers.
The MSCI India index is trading at a one-year forward price-to-earnings multiple of 19.51 times, well ahead of the MSCI Asia Ex-Japan Index (11.46x) and the MSCI Emerging Markets Index (10.7x), shows Bloomberg data .
Deepak Jasani, Head of Retail Research, HDFC Securities said that India has high potential for earnings growth and even better macro. Thus, despite expensive valuations, FIIs are likely to continue investing in Indian stocks.
Not only this, the worry of slowdown in China gives India an opportunity to grab foreign funds. According to the latest BofA Securities report, emerging market funds have increased their allocation to India from 18.1% in June to 19.7 per cent in July, while reducing allocation to China.
On the other hand, if the bearish fears really fade away, FII inflows may come under pressure again. In addition, crude oil prices are an important watchdog for India’s economic health as the country is a net importer of the commodity.
Meanwhile, DII inflows are expected to strengthen, though profit-booking will be accompanied by them.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.