Mumbai: The unabated flow of foreign money into India in the past two months has raised the holdings of foreign institutional investors, or FIIs, in BSE 500 stocks to their highest level in five years.

FIIs have raised their shareholding in nearly three-fourths of these companies that make up some 93% of the Bombay Stock Exchange’s (BSE) market capitalization, a study of their stockholding pattern at the end of September shows.

Faced with shrinking yields in the West, foreign investors have purchased some $23.1 billion of Indian stocks this year, pushing their holdings in BSE 500 firms to 14.52%. Analysts expect the shareholding to go up further in the coming weeks on expectations of another round of quantitative easing in the US—something which was indicated by US Federal Reserve chairman Ben Bernanke in a 15 October speech at a conference held at the Federal Reserve Bank of Boston.

India’s reluctance to install capital controls—unlike other emerging markets such as Brazil and Thailand—and economic growth potential would be key drivers of foreign flows to the country, analysts believe. India, which grew by 8.8% in the first quarter, is the third fastest growing economy in the world after Brazil and China.

“This is not really surprising since the current rally has been led by FIIs," said Girish Pai, head of research at Centrum Broking Pvt. Ltd.

“Domestic institutions have not really participated as the mutual fund industry continues to face rising redemptions and that has led to higher FII holding," he added.

The flow of foreign funds to Indian equities has been quite broad-based, with FII shareholding rising in almost all sectors and companies of all sizes.

Over two-thirds of the 33 Nifty firms saw their FII holding go up in the September quarter by an average of 1% over the previous quarter. Nifty comprises the 50 most liquid stocks traded on the National Stock Exchange and not all of them have declared their shareholding pattern yet.

Aggregate FII shareholding in Nifty firms now stands at 17.29%, up 3.3 percentage points from the previous quarter, albeit still marginally less than the 17.8% stake FIIs held in these stocks in March 2006.

The trend is similar in the broader market.

A Mint analysis of 257 of the BSE 500 firms, which have declared their shareholding pattern and for which data is available since the past five years, shows that 176 firms among them have seen their FII holding rise in the September quarter by an average 1.5 percentage points.

The aggregate FII shareholding in the 257 firms rose to 14.52%, the highest level for this set of firms since 2006. The previous peak was in the rally of 2007, when the FII holding touched 14.3%.

Graphic: Yogesh Kumar/Mint

Flows from exchange-traded funds—that typically go into large stocks—in September at around 10% have been less than the year-to-date average of 15-16%, she added.

Unlike the June quarter, when auto and banking stocks had emerged as the favourite FII picks on the back of strong earnings growth, the buying the September quarter was broad-based.

“This is typical of a bull run, where there are a few leading sectors initially and then interest picks up in other sectors," said Vikas Khemani, head of institutional equities at Edelweiss Capital Ltd.

FII holding increased most in banking and pharmaceutical sectors in the September quarter.

Earnings growth in the banking sector and an expected upside in Indian pharma companies, which are going through a phase of consolidation, would continue to attract FII flows, analysts say.

While buying in auto stocks was less, analyst say there is still some steam left in a sector that has been quite resilient in the slowdown.

Interestingly, under-performing sectors such as cement and construction are seeing renewed interest, with FII holdings up in most companies in these sectors in the just ended quarter.

“Foreign investors are coming in because they believe in the India growth story," said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as an FII in India.

“And if you believe in the India story, you have to play the consumption and infrastructure themes," he added.

Among Nifty firms, State Bank of India, HDFC Bank Ltd and ACC Ltd were the biggest gainers, with FIIs raising their stake by at least 2 percentage points in these firms.

Dr Reddy’s Laboratories Ltd saw the largest drop in FII shareholding with a 1.7 percentage points fall to 26.8%.

The other firm that saw a substantial decline in FII holding was Kotak Mahindra Bank Ltd, where FIIs diluted their stake by 94 basis points to 25.03% after reducing their stake by 2.6% in the June quarter. One basis point is one-hundredth of a percentage point.