Mumbai: Foreign institutional investors (FIIs), the main driver of Indian equities, have bought stocks worth a net $2.67 billion (around Rs.14,285 crore) till 22 January, the most in January ever since this class of investors were allowed to make such purchases in 1993.
Analysts said the flow may continue if the government keeps on pushing for policy changes and the February budget is not a populist one. The likely move by the Reserve Bank of India to lower policy rates in phases through the year will also help the market maintain momentum, they said.
The biggest inflow after this month’s record was seen last January when FIIs invested $2.18 billion. With seven more trading days left in the month, net FII investment in equities is likely to cross $3 billion if the trend continues.
India, which saw net outflows of FII funds worth $4.5 billion in 2008 when the US sub-prime crisis ravaged global stocks, has been a major beneficiary of the money that emerging market funds have been attracting as the world’s central banks continue to keep borrowing costs low.
Investor sentiment got a further boost after the US fiscal cliff was averted, the euro zone showed some signs of stabilizing and concerns of China overheating eased. Experts think the foreign fund inflows will continue as they signal a clear shift in investor appetite from bonds to equities after a long time.
“Since 2006, the bigger picture of global fund flows has been one of bonds seeing massive inflows and equities seeing outflows. For the first time in six years, since November we are seeing equity inflows outpace bond inflows, given that the worst case has not played out with the macro risks of 2012. India is a beneficiary of this, with a bulk of the inflows being driven by emerging market funds,” said Saumil Shah, managing director and head of equity sales trading at Bank of America Merrill Lynch (BofA ML).
“What has also helped us greatly is the tremendous effort on the part of policymakers to tackle the fiscal and current account deficits, kick-start reforms, and the anticipation of rate cuts. We feel this will continue to sustain with appetite for risk coming back to equities after several years,” he added.
In its efforts to rein in the fiscal deficit, the government recently announced deregulation of diesel prices over time. It has also raised the import duty on gold to lower the current account deficit.
The “reform programme in India is quite convincing, and as long as reform initiatives continue, FIIs will continue to pour in money. This will see record inflows”, said Gary Dugan, chief investment officer (Asia and the Middle East) at RBS Wealth Division.
In 2010, FIIs pumped a record $29.32 billion into Indian equities. Last year, this fell to $24.55 billion.
A cheaper local currency has also made Indian markets attractive. The rupee is down 9.5% against the dollar from a year ago. In the September-December period, it fell 3.88%. The local currency closed at 53.81 to a dollar on Tuesday, down 0.1%.
With foreign funds pouring in money, key equity indices have been on the rise in January. While the benchmark Sensex of BSE fell 0.6% to close at 19,981.57 points on Tuesday, the broader 50-share Nifty of the National Stock Exchange of India declined 0.56%.
According to Shah of BofA ML, the government’s focus in the budget will be on fiscal consolidation. The investors are keenly watching whether this year’s fiscal deficit estimate of 5.3% of gross domestic product (GDP) will be met.
At a meeting with foreign funds in Hong Kong on Tuesday, India’s finance minister P. Chidambaram reiterated his determination to keep the fiscal deficit in check and to ensure that GDP growth accelerates closer to 7% in 2013-14. “The minister articulated India’s openness to attract all kinds of inflows, financial and strategic,” said Pramit Jhaveri, chief executive officer of India at Citibank NA.
Citibank hosted the finance minister at his first global investor meet in Hong Kong for about 200 investors in Indian equity and debt.
Chidambaram suggested that the fiscal deficit target will be met and that taxes won’t be raised, even though government policy should be biased towards the poor. He also said the fiscal deficit will be shrink by 0.6% every year, that building infrastructure will be the government’s top priority, and that the goods and services tax legislation will be in place by December. He also said that GDP growth will revive to 8% in fiscal 2015, a Citibank release said.
Chidambaram will meet FIIs in Singapore on Wednesday.
With commodity prices cooling off and earnings of many Indian companies beating analysts’ expectations in the December quarter, brokerage firms expect a bull run and the Sensex reaching new heights this year, but two key risks are inflation remaining sticky and the central bank taking time to cut its policy rate.
Foreign funds began increasing their exposure to Indian equities in the beginning of calendar 2012, after taking money out in 2011, following two tranches of liquidity injection worth €1 trillion (around Rs.72 trillion today) by the European Central Bank via its long-term refinancing operations programme.
After a lull in the middle of the year, flows gathered steam in September with the government kicking off a long-pending policy change process, with the relaxation of foreign investment norms in airlines and retail, among other measures, ending a lengthy impasse. Investors were also buoyed by hopes at the time that US lawmakers would agree on a budget deal by the year end to avoid a fiscal crisis.