According to financial analysts, a record Rs 4 trillion left the equities market as the Foreign Institutional Investors in India (FIIs) exited the market. Per NSDL data the Foreign Institutional Investors (FIIs) in India sold Indian equities worth Rs 214217 crore in Indian markets from the beginning of FY2021-22 till June 10, 2022.
This persistent selling of equities by Foreign Institutional Investors in India (FIIs) drove the equities market to its lowest in over a decade. However, the trend over the past couple of months seems to be reversing. With more buying versus selling, the return of FII in India looks imminent.
Before we try to understand this reversing trend, let’s look at some of the key reasons that drove the FII out of the equity markets in India.
The Shift in the Sentiment of Foreign Institutional Investors (FIIs) in India for the Equities Market
It is essential to understand what changed for the FII in India that led them to offload such enormous amounts of holdings in 15 months. Analysts believe several factors contributed to this paradigm change in sentiment of the FIIs in India.
- Central banks around the world tightened liquidity following Fed rate hikes making the dollar stronger.
- Inflation had hit the roof globally.
- The conflict between Russia and Ukraine resulted in a record price rise in crude oil worldwide.
The central banks purchased bonds from commercial banks and financial institutions to curb inflation and pump more money into the system. It also helped to keep the interest rates under check. However, this was not a permanent solution, and buying bonds to minimize liquidity in the financial system was not a viable long-term option for central banks.
It made the FIIs withdraw their investments from emerging markets like India and take their funds to more financially stable destinations such as Indonesia and Brazil.
Reasons for the Return of the Foreign Institutional Investors in India
The aggressive selling by the FIIs in India saw a dip after a consistent selling spree. As recently as August 2022, FIIs pumped investments worth Rs 16,175 crores into Indian equities.
The FIIs in India are currently cherry-picking stocks and taking advantage of high-value stocks in the Indian equities market that is in a price correction mode. It confirms that Foreign Institutional Investors are back with renewed interest in the equities market in India.
Let’s look at the reasons for what triggered this U-turn.
1. Expectations in Rate Hikes:
Central banks globally are expected to slow down on interest rate hikes. According to a poll, Reuters conducted in July 2022, economists who expected a 100-bps rate hike by the US Fed are predicting a hike of 75 bps. The European Central Bank initiated a rise of 50 basis points, double what the economists had expected.
The central bank moves worldwide, and a weakening dollar considerably lowered the risk sentiments of Foreign Institutional Investors in India in the equities market. Hence, the FIIs sitting on a pile of cash started seeking new investment opportunities in the Indian equities market.
2. Resilient Earnings Outlook:
Market gurus predict that the consensus net debt/EBITDA for BSE500 may experience a fall to 1.1x for the FY23E as opposed to the range of 3.0-3.5x recorded in the three years in the pre-Covid era. The banking system has also decreased below 6% due to non-performing assets.
Therefore, compared to major Asian economies, specifically China, a country still experiencing structural problems, the outlook on earnings for Indian corporate seems not only resilient but also promises future growth for FIIs in India.
3. Attractive Valuation:
A price correction in Indian equities may also be why Foreign Institutional Investors in India are back with their investments in the equities market. Compared to its long-term average of 21x, over the remaining months of the financial year 2022-23, Nifty’s expected earnings via trade will continue to be at its current 18x.
Given the market dynamics, the FIIs possibly did not wish to lose complete exposure to the Indian stock market, given that the global economy is still recovering from rising inflation.
4. Macro Factors:
The Reserve Bank of India and the central government have managed to limit the skyrocketing inflation rate to below 8%. According to RBI projections, the inflation rate may decrease to below 6% by March 2023.
Credit growth has witnessed a recent uptick, and the collections from GST have also picked up a steady pace. As a result, credit card spending in India is at an all-time high. The manufacturing purchasing managers’ index (PMI) recently touched a record 8-month high, and the real estate industry is also gathering consistent momentum after several months of low to moderate growth.
All of these macro factors instill trust and confidence of FIIs in India in the equities market and, by extension, the Indian economy.
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FII Buying is Important for India
Foreign Institutional Investor in India continues to play a critical role in sustaining the Indian economy and acting as a market performance catalyst. The overall inflow of the Indian economy is still under the heavy influence of Foreign Institutional Investor as they invest a significant amount of money in securities such as banks, mutual funds, and more that drive the Indian equities market.
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