FPIs are flooding the Indian stock markets, injecting Rs 1.5 trillion despite the uncertainty

In a dazzling revival, foreign investors have graced Indian stock markets with inflows of nearly Rs 1.5 trillion by 2023, fueled by optimism over the country's resilient economic fundamentals amid the shadows of a bleak global scenario. Experts believe that the positive trend could continue into 2024.

This follows Indian equities witnessing the worst net outflow of Rs 1.21 trillion by FPIs in 2022 following aggressive rate hikes by global central banks, following net inflows for three consecutive years.

Going forward, as the general elections approach next year, political stability and economic growth will become focal points for foreign investors. Moreover, global signals on the inflation and interest rate scenario would dictate the flow of foreign money into Indian equities, said Himanshu Srivastava, Associate Director Manager Research at Morningstar Investment Research India.

India, with its promising position for economic growth, is expected to continue attracting foreign investment flows, he added.

So far, the foreign portfolio investors (FPIs) have made a net investment of about Rs 1.5 trillion in the Indian equity markets and about Rs 60,000 crore in the debt market. Collectively, they pumped in over Rs 2 trillion into the capital market, according to available data from the depositories.

Of the net inflows of Rs 1.5 trillion into the stock market, nearly Rs 43,000 crore was invested in the first two weeks of December following increased political stability, thanks to the BJP's success in recent elections in three key states. If this trend continues, this could be the best year for the FPI flow.

FPIs have made a net infusion of Rs 25,752 crore in equities in 2021, Rs 1.7 trillion in 2020, which was the best year, and Rs 1.01 trillion in 2019.

In the year 2022, foreign investor flows were largely driven by factors such as inflation and interest rate scenarios in developed markets such as the US and UK, currency movements, the trajectory of crude oil prices, geopolitical scenarios and the health of the domestic economy . economy, among others, Srivastava said.

The increased FPI investments were driven by the country's resilient economic fundamentals, forward-looking policy reforms, optimistic corporate earnings outlook, global liquidity trends and a growing recognition of India's continued long-term growth potential, said Bharat Dhawan, Managing Partner of Mazars in India. . Mazars is an international audit, tax and consultancy firm.

“India is one of the top investment destinations for FPIs. There is now near consensus within the global investment community that India has the best prospects for sustainable growth among emerging economies for years to come,” said VK Vijayakumar, Chief Investment Strategist. at Geojit Financial Services.

“This growth has the potential to create phenomenal wealth through the stock market. FPIs are investing to take advantage of this potential wealth creation,” he added.

After three straight years of retreat, foreign investors also made a comeback in the debt markets this year, injecting around Rs 60,000 crore in 2023 (till December 15), marking a notable shift in their capital flow.

They raised funds totaling Rs 15,910 crore in 2022, Rs 10,359 crore in 2021 and Rs 1.05 trillion in 2020.

JP Morgan Chase & Co's announcement in September that it will add Indian government bonds to its benchmark emerging markets index from June next year has influenced inflows into the country's bond markets this year, says Mayank Mehraa, smallcase Manager and Principal Partner at Craving Alpha.

This historic drawdown, scheduled for June 2024, is expected to benefit India by attracting approximately $20 to 40 billion over the next 18 to 24 months. This could make Indian bonds more accessible to foreign investors and potentially strengthen the rupee, thus strengthening the economy.

In terms of sectors, FPIs favored financial, IT, pharmaceutical and energy sectors due to the country's strength in technology and healthcare, and its commitment to sustainable development added to its appeal to foreign investors.

FPIs started the year on a negative note, and the first two months saw an exit of hot money as they withdrew over Rs 34,000 crore.

But the FPIs switched gears in March and became buyers, buying equities relentlessly until August on the strength of the Indian economy's resilience against an uncertain global macro backdrop. During these six months, they pumped in Rs 1.74 trillion.

However, FPIs moved away from stock prices in September, and the negative trend continued the following month due to economic uncertainties in the US and Eurozone and growing concerns about global economic growth.

Moreover, higher crude oil prices, persistent inflation rates and expectations that interest rates will remain at high levels for longer than expected have prompted foreign investors to adopt a wait-and-see attitude.

In November, FPIs again became buyers with a net investment of Rs 9,000 crore, and the positive momentum has continued this month following the outcome of recent elections in three key states.

On the international front, signals from the US Federal Reserve about three expected rate cuts in the coming year, marking a departure from the prevailing high interest rate regime, also prompted FPIs to invest.