While foreign investors have been bullish on Indian stocks, domestic institutional investors (DIIs) have been selling off Indian equities this month. This indicates that local investors are not as optimistic about the Indian market as foreign investors are at the current juncture. DIIs had been buying stocks in the first three months of the year, but they have become more cautious recently as the market has been reaching new record highs.
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Why are FPIs buying?
FPIs have many reasons to be positive about Indian stocks. Let’s take a look at some of them.
1. Anticipation of the end of the aggressive monetary tightening era
Foreign investors (FPIs) eagerly bought stocks in emerging markets, including India, because they believed that the US Federal Reserve would stop raising interest rates. In April, the Reserve Bank of India (RBI) had already decided to pause rate hikes, which made investors optimistic. In June, the US Federal Reserve also decided to pause rate hikes, confirming market expectations. FPIs didn’t want to miss the chance to invest in the growing Indian market, so they jumped in to take advantage of the situation.
2. Betting on India story
The biggest reason behind FPIs’ optimism about the Indian market is the robust outlook of the Indian economy when the global economic outlook is gloomy. While some of the top economies of the world, including the US, China and Europe appear to be struggling, Indian macroeconomic indicators, such as GST collections, auto sales numbers, trade deficit and fiscal deficit numbers, GDP growth and inflation trends are flashing positive signals. Corporate earnings for the March quarter beat expectations which also infused positive sentiment.
3. China’s poor show
China remains a formidable economic force in the world. However, the world’s second-largest economy is still struggling to emerge from the Covid shock. China’s deteriorating economy has attracted investors towards India as its growth potential and position in the global market make it an appealing destination for investment.
4. Favourable government policies
Experts point out that the announcement of new business agreements by Prime Minister Narendra Modi and US President Joe Biden has also given a boost to FPIs’ outlook on the Indian market.
The spotlight is on India as a result of these deals, global ties, and friendship, say analysts. With the government also emphasising these agendas, both FII and foreign direct investment (FDI) flows begin to move quickly.
Why are DIIs selling?
A careful perusal of the data shows that DIIs are booking some profit but they do not appear strongly pessimistic about the Indian stocks. For the year, DIIs have bought Indian stocks worth about ₹85,000 crore which is less than the amount FPIs have invested. Experts do not see it as a matter of concern.
“With regards to DIIs resorting to selling, we feel it is more to do with profit booking as they have participated in markets from lower levels when there was limited participation from the FPIs side,” said Manish Chowdhury, Head of Research at StoxBox.
Arpit Jain, Joint MD at Arihant Capital explained that most domestic institutions invest solely in Indian markets. As their earlier investments yielded good returns, they partially booked profits.
“With increasing profits, the proportion of equities in balanced funds rises compared to debt holdings. To rebalance, they reduce equity weight, resulting in equity selling. Conversely, for FPIs, India is one investment destination among various global options. Recently, India’s macroeconomics has substantially improved, and its growth prospects remain robust, leading to continued positive FPI flows,” Jain explained.
Will the trend continue?
Foreign investors may face two risks that could dampen their enthusiasm. Firstly, if the US Federal Reserve resumes aggressive rate hikes, it could impact investor sentiment. Secondly, if India’s economic outlook worsens, it could also affect foreign investors’ confidence in the Indian market.
The market might experience a mild consolidation in the near future since it has reached record levels. However, analysts are generally optimistic about the Indian market for the medium to long term. They anticipate that foreign investors will likely keep purchasing Indian stocks in the upcoming months. Domestic institutional investors may also begin buying stocks after the market corrects, especially as the earnings for the first quarter of FY24 percolate.
Chowdhury of StoxBox underscored that the effective monetary policy, stable political environment, improving macro-fundamentals and a large headroom for growth in corporate earnings are something which is very unique to India at the current moment.
“We believe that the global geopolitical situation which unfolded post the Russia-Ukraine war has tilted the scales heavily in favour of Indian companies. The FPIs now have increased optimism about the sustainability of India’s performance and things will improve further from hereon,” said Chowdhury.
Some analysts believe that the market may have already discounted Fed hikes and they may not deal a significant blow to market sentiment.
“An interest rate hike by the US Fed in July is widely discounted by the markets and we believe that this is unlikely to deter the flow of FII liquidity in Indian markets as it is expected to gather momentum ahead despite some mid-term corrections,” said Avinash Gorakshakar, Head Research of Profitmart Securities.
Gorakshakar added that FPIs are expected to continue their buying in Indian equities due to a stable rupee but more so, because of a larger allocation expected for India following a cutback in allocation for the ‘China Plus’ strategy which is aided by attractive valuations and stronger earnings growth expected in the current year.
Mayank Mehraa, Smallcase manager and principal partner at financial consultancy Craving Alpha is confident that FPIs will continue buying Indian equities as they have been in the last few months.
“We firmly believe that FPI trends will not only sustain but potentially intensify as Indian companies release their Q1FY24 results and further build investor confidence,” said Mehraa.
“There is a hopeful anticipation that the RBI may initiate rate cuts ahead of the Fed, considering that interest rates in India currently surpass inflation levels, which are under control. This potential scenario of rate reductions has the potential to trigger a fresh wave of aggressive buying in India, reinforcing the positive FPI trend,” Mehraa said.
Prashanth Tapse, Senior Vice President of Research at Mehta Equities also believes India is standing out as the best among the emerging markets in the world today and advocates foreign inflows will continue to flow in coming months.
“Global microeconomic and geopolitical situation is neutral as of now which is acting support for markets like India with reaping benefits of lower crude and stable interest rate scenario. We continue to see India outperforming the global markets. Any change in the US Fed’s outlook on interest rates would not have a meaningful impact on our economies. Despite valuations trading near peak, downside risk could only come if the monsoon fails to remain above normal and trigger domestic inflation,” said Tapse.
However, Aamar Deo Singh, Head Advisory at Angel One thinks FPIs may be slightly cautious in the future, based on recent pronouncements by the US Federal Reserve regarding interest rate hikes, and with high valuations across numerous industries.
However, Singh added that in the long run, India is one of the few global economies with considerable pockets of investment possibilities with the ability to generate decent returns.
Jain of Arihant Capital believes the sustainability of the FPI trend relies on global investment opportunities, relative risk assessments, and valuations. Currently, India finds itself in a favourable position. However, as valuations become richer, the trajectory could shift.
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Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 08 Jul 2023, 07:31 PM IST