Foreign investors stock up on Indian equities with record net inflow

Excess liquidity, enticing valuations and weak point within the US greenback propelled overseas traders to flock to the Indian inventory market in an enormous approach with the best ever internet influx of Rs 1.four lakh core in 2020, however in addition they dumped debt securities value a report quantity amid pandemic pushed stress within the economic system.

The overseas portfolio traders (FPIs) have made a internet outflow of a bit of over Rs 1 lakh crore in 2020 thus far, although hybrid devices witnessed a internet influx of greater than Rs 10,000 crore, as per the newest knowledge obtainable with depositories.

The market males count on an identical pattern to proceed for a number of months until there’s a main change within the general funding state of affairs. “With some major developments on Covid-19 vaccine front, India stands to benefit. Also, growth in the economy will improve investor sentiments and their outlook towards India. From the risk-reward profile perspective, these aspects make India a good investment destination,” mentioned Himanshu Srivastava, Associate Director – Manager Research, Morningstar India.

However, if the economic system stays weak for an extended time frame, that may very well be an enormous deterrent. Also, if there’s one other wave of the coronavirus pandemic leading to re-implementation of lockdown measures, that might dampen sentiments and switch overseas traders risk-averse, he added.  

As the yr 2020 attracts to an in depth, the FPIs have thus far made a internet influx of Rs 1.42 lakh crore — the best stage of such funding in a calendar yr since 2002. This is the fifth time in historical past when internet funding by overseas traders in equities has crossed Rs 1 lakh crore mark in a yr. Prior to this, the feat was achieved in 2019, 2013, 2012 and 2010, when abroad traders infused a internet sum of Rs 1.01 lakh crore, Rs 1.13 lakh crore, Rs 1.28 lakh crore and Rs 1.33 lakh crore respectively.

On the opposite hand, debt markets have seen FPIs flip internet sellers in 2020 as they withdrew an enormous quantity of Rs 1.07 lakh crore from debt, nevertheless, they invested a internet quantity of Rs 23,350 crore in debt-VRR. The voluntary Retention Route (VRR) channel was launched by the Reserve Bank of India (RBI) in March 2019 to draw long-term and steady FPI investments into debt markets.

Broadly, investments via this route are freed from macro-prudential and different regulatory norms relevant to FPI investments in debt markets, supplied FPIs voluntarily decide to retaining a required minimal proportion of their investments in India for a sure interval.

The yr 2020 marked the largest outflow by overseas traders from debt markets since 2002, when bifurcation of internet funding knowledge turned obtainable.

The earlier report outflow was in 2013, when FPIs pulled out a internet sum of Rs 50,849 crore from debt markets. Also, an exodus to the tune of Rs 47,795 crore was seen from such devices in 2018.

Taking all asset lessons collectively, FPIs have made a internet funding of Rs 68,200 crore ($9.three billion) within the Indian capital markets (fairness, debt, debt-VRR and hybrid) thus far in 2020, whereas a number of days of buying and selling is but to happen.

While FPIs have made gross purchases value Rs 20.7 lakh crore thus far this yr, they’ve offered securities value Rs 20 lakh crore throughout all devices.

In comparability, the web influx into Indian capital markets was at Rs 1.36 lakh crore in 2019. This comprised a internet funding of Rs 1.01 lakh crore in equities, Rs 25,880 crore in debt and round Rs 9,000 crore in hybrid securities.

Experts mentioned availability of extra liquidity within the international monetary market, enticing valuation in comparison with developed markets, and weak point within the US greenback have supported shopping for in Indian equities.

Nirali Shah, Senior Research Analyst at Samco Securities, mentioned that 50 per cent of overseas inflows in India have been via certified institutional placements (QIPs) and strategic stake gross sales such because the HUL-Glaxo deal and the remaining half have been via secondary market purchases.

A big issue for the large inflows may very well be the weakening of the greenback which has brought on a shift in cash in direction of rising nations given their rates of interest are on the decrease finish and the inflation-adjusted return is way greater, she added.

According to Morningstar’s Srivastava, one of many major causes for funding in equities is the supply of extra liquidity within the international monetary markets with main central banks asserting stimulus packages to convey their economic system again on monitor.

India is just not the one rising nation to expertise a gush of overseas inflows and different rising markets have additionally witnessed sturdy investments in proportion to their weights on the earth economic system.

 “India has attracted more than a fair share of emerging market inflows due to stronger than expected economic recovery, moderation in active Covid-19 cases since mid-September and a supportive policy framework in terms of an accommodative monetary policy and a fiscal push on promoting manufacturing sector,” mentioned Gaurav Dua, Senior Vice President – Head Capital Market Strategy & Investments, Sharekhan by BNP Paribas.

Also, FPI flows obtained a lift from a positive shock in second-quarter company earnings and a few structural reforms in labour, agriculture and monetary sectors, mentioned Alok Agarwala, Chief Research Officer of Bajaj Capital. “The government initiatives to attract FPI/FDI investors through hosting investor conferences, making structural changes to provide ease of doing business, announcing long-term measures like Production Linked Incentives (PLI) under AatmaNirbhar Bharat have resulted in positive flows into India,” mentioned Divam Sharma, co-founder at Green Portfolio.

On the opposite hand, overseas traders don’t seem positively inclined in direction of Indian debt securities within the present state of affairs. In reality, an enormous shift has been seen from debt to equities as inventory markets have witnessed the next than anticipated restoration fee.

“Debt market has been in turmoil lately due to the rising credit risk. Given the stress in the economy and limited scope for further rate cuts, equity markets offered much better opportunity post the sharp correction earlier this year and that resulted in an outflow from debt markets,” Dua mentioned.

Green Portfolio’s Sharma mentioned the unfold of presidency securities (G-Secs) with company bonds has narrowed, ensuing within the promoting of debt devices by FPI.

Further, the price of funds of presidency and corporates has moderated on the again of RBI’s financial easing and liquidity infusion, making the debt markets much less enticing resulting from falling yields.

Sector-wise, banking, monetary companies, IT and FMCG have attracted greater inflows from FPIs.

According to Sharma, there’s an rising conviction to put money into know-how options as folks proceed to do business from home, devour extra on-line and cut back bodily contact.

When it involves investing in equities, it was a great yr to start out with as FPIs put in almost Rs 14,000 crore in shares throughout January-February. They went on a promoting spree in March as they offered internet property value Rs 62,000 crore, largely a results of the coronavirus outbreak and ensuing risk-averse atmosphere.

Uncertainty over the gravity of the pandemic’s impression on the worldwide economic system and monetary markets worldwide triggered a flight to security amongst overseas traders as they rushed to exit from comparatively riskier funding locations, comparable to rising markets like India.

The sell-off continued in April, though the tempo of internet outflow got here down considerably on measures introduced by the federal government and the RBI periodically to revitalise the sagging economic system.

FPIs made a comeback in May and the positive momentum continued until August as they pumped in a internet quantity of Rs 91,000 crore in the course of the interval below assessment.

This may very well be attributed to a lovely valuation of the Indian equities after the sharp correction in March and important depreciation of the Indian rupee towards the US greenback, which supplied FPIs a moderately good entry level. Furthermore, the lifting of lockdown curbs and the federal government’s efforts to kickstart financial exercise within the nation additionally garnered positive response from overseas traders. Certain technical elements together with the over-subscribed rights concern of Reliance Industries additionally attracted important overseas flows.

The state of affairs, nevertheless, reversed in September as FPIs turned internet sellers in equities. The outflow was triggered largely by issues over the nation’s financial development and rising border tensions between India and China. The nation’s gross home product contracted by an enormous 23 per cent for the quarter ending in June 2020, denting the investor sentiments. Foreign traders additionally stayed on the sidelines as Covid-19 instances in Europe and different nations renewed fears of a chance of recent lockdowns, thus dashing hopes of any swift financial restoration. However, the opening of the home economic system, resumption of enterprise actions, better-than-expected quarterly outcomes and a fall in India’s Covid-19 lively case depend helped convey again the overseas traders into Indian equities in October, November and December.

Going forward, Bajaj Capital’s Agarwala mentioned the tempo and sustainability of earnings restoration (as displayed in Q2FY21) and international liquidity state of affairs are the important thing elements that can decide FPI flows in Indian equities in 2021.

He additional mentioned FPI flows in Indian bonds are more likely to get better as soon as actual rates of interest flip positive, which is unlikely to occur earlier than the fourth quarter of the present fiscal.