Net FII inflows in July, but a reversal of trend is unlikely
While a full-fledged US-China trade war would be disastrous for the global economy, currently the situation is not as bad as feared earlier
Foreign institutional investors (FIIs) have been net buyers of Indian equities in July, in a marked reversal of trend from the previous three months (see chart). What’s more, FII selling in the debt markets too has been much lower. However, FII net inflows into equities have been marginal. And on a year-to-date basis, they remain net sellers in Indian stocks. What has changed? Actually nothing much, but things haven’t got worse either.
First of all, the ongoing trade conflict between the US and China is increasingly becoming a background noise for the Indian stock market. While a full-fledged trade war would be disastrous for the global economy, currently the situation is not as bad as feared earlier.
In the backdrop of a trade war, the US 10-year Treasury yield was anticipated to breach the 3% level and stay elevated. Contrary to expectations, yields came off. Yields on Indian bonds too haven’t moved up further.
Also, after the recent run-up, the dollar is now stabilizing. The fall in the rupee, which was hurting FIIs’ returns, too has stabilized. The price of crude oil—a key contributor to India’s trade bill— has corrected a bit. It’s no wonder then that India’s volatility index—the fear gauge—has slipped to 12.42 from the peak of 24 seen in February this year. Complacency is back in the market.
Corporate earnings have started to look up, some banks have said the worst is behind them and value-buying in select large-cap stocks is pushing Indian benchmark indices to newer highs, although the mid-cap and small-cap counters continue to bleed.
Will FII inflows gather steam again? It is too early to cheer. One is unlikely to see huge inflow of funds from FIIs until the general election is out of the way. While earnings may be improving, valuation of the Indian equity market compared to Asian peers is still expensive.
Nor is the Indian macro scenario much better. Inflation has moved up and higher farm support prices could lead to higher food prices. The risk of a higher fiscal deficit remains and government borrowing for the second half of the year may spike given inadequate goods and services tax collections.
Investors will of course be closely watching the US Federal Open Market Committee and the Reserve Bank of India’s monetary policy announcements on Wednesday. But the risks remain and the cessation of selling by FIIs could be just a temporary reprieve.