The gush of cheap foreign money into Indian stocks has hit Rs 1.98 lakh crore in the fiscal year through December 15, a level not seen in any fiscal year to date since FY93 and could continue amid record low-interest rates and easy liquidity in developed markets.
Foreign investors bought $2.81 billion of Indian equities between December 1 to 9 and India saw record high FII interest in November at over Rs 65,000 crore. The key reason for the same was an increase in India’s weightage by MSCI in their global Emerging Markets Index to 8.7 percent from 8.1 percent. This increase in weight could have resulted in a passive flow of over $2.5 billion. This year, they have bought around $18.92 billion.
The top 5 sectors which have accounted for a significant chunk of FII/FPI flows are banks (almost a fifth), household and personal products, capital goods, oil and gas and other financial services, including NBFCs, HFCs, AMCs (see chart). In dollar terms too, the investments are at a record level.
The fund’s binge by FIIs has led to Indian markets scaling new highs every passing day. While FIIs have been buying non-stop, domestic funds are selling off.
The index is but one reason for seeing a surge inflows. Other reasons could be an improvement in the economic scenario post-COVID-19 and the strong result season apart from High liquidity infusion by central banks, which could now be creeping in.
Because of index changes, while passive flows could have been around $2.5 billion, active flows could be around 6x of the same given that 87% of the money flow into India is from non-India dedicated active funds. The country has not seen this kind of money flowing in as yet.
Another major reason behind such a large inflow is the expected stimulus worth trillions of dollars from central banks to revive economies that are hit hard by the COVID-19 induced lockdown, said Hemang Jani, Head – Equity Strategy, Broking & Distribution, Motilal Oswal Financial Services Ltd.
Commentaries of banks suggest that there is an improvement in growth and asset quality. The asset quality outlook is much better than initially feared as collection efficiency picked up sharply in 2QFY21.
India has seen much higher consistency in FPI flows in comparison to other emerging markets. This should continue to be the case going forward because businesses in other emerging markets (barring China) cannot hope to attain the scale that businesses in India would attain. The ability of the country to absorb large flows is also there as are investible assets.
India is being viewed as a potential opportunity by investors with the economy having the capacity to grow tremendously. The march of globalization has slowed down on account of COVID-19, maybe even reversed. The border situation has helped increase awareness about improving domestic manufacturing capabilities. Buoyed by strong support from the Government, FII investment has been strong and is expected to improve going forward.