5 key measures in Budget 2023 can help FPIs, DIIs to stay firm in Indian markets

The start of 2023 has been on the selling side by foreign portfolio investors (FPIs). This is already a matter of concern for experts since last year FPIs made record selloffs in Indian equities due to macroeconomic risks and January began on the same sentiment with extensive funds outflow. However, some key measures in Budget 2023 can help foreign investors stay firm in the stock market. Not just that, these developments can also drive DIIs demand in equities.

So far in January, FPIs have pulled out ₹ ₹15,236 crore from Indian equities. In the previous month, FPIs were buyers with an inflow of ₹11,119 crore.

However, overall in 2022, FPIs sold ₹1,21,439 crore which can be attributed due to macroeconomic uncertainties, rising interest rates trend, and geopolitical tension. Notably, in December last year, the Sensex touched a lifetime high of 63,583.07 and the Nifty 50 hit a historic high of 18,887.60.

But have pulled back from these levels in January due to weak global cues, especially developments in US and China markets. Also, Q3 earnings played a role in influencing sentiments in the current month. By end of January 20th, Sensex held above 60,600 and Nifty 50 managed to float over the psychological mark of 18,000.

Meanwhile, foreign institutional investors (FIIs) have also immensely removed their money from Indian stocks in January. Between January 1st to 20th, the FIIs selloff stood at ₹19,880.11 crore, as per Stock Edge data. In December 2022, the outflow was around ₹14,231.09 crore. On the other hand, the overall outflow in the entire year 2022, came in at a record ₹2,78,429.52 crore.

Explaining the latest month's selloff in Indian equities, Dr.V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the major trend in FPI investment in January is the sustained selling by FIIs, which is a bit surprising early in the year.

He added that the sustained selling by FPIs is a bit surprising since the dollar index has been steadily declining. The dollar index has declined from the 2022 peak of 114 to around 103 now. Declining dollars is favourable for emerging markets and, therefore, India should have received inflows. But what is happening now is that FPIs are investing heavily in cheaper markets like China, Hong Kong, South Korea, and Thailand and they are selling in relatively expensive India.

On the other hand, domestic institutional investors continued to pump money into Indian equities. So far in January 2023, DIIs bought ₹16,182.38 crore in domestic equities. In 2022, the inflow was at a record ₹2,76,698.72 crore.

What measures to expect in Budget 2023 that could drive FIIs and DIIs positioning in Indian markets?

According to Prakhar Pandey, Founder and CEO, of Moolaah, there has been constant selling across FPI due to the global elevated inflation, and rise of interest rates in the US, making developed markets a far more lucrative investment opportunity compared to India. The tolerance of domestic investors to withstand the fiscal deficit pressure is extremely high, while foreign portfolio investors are taking it as an opportunity to book profits.

With this budget's focus primarily on defence and infrastructure, the following measures as per Pandey can help FPIs / DIIs to stay firm in Indian markets.

- Reduce long-term capital gains tax to 5%, to withstand booking of profits

- FPI rules to be relaxed for NRI's, investing through a pooled vehicle/master-feeder, to increase investment allocation to our emerging economy.

- The imposition of CTT and STT has hampered market liquidity, leading to high transactional fees to execute a transaction and lower profitability.

- STT/CTT rebate under section 88E, will lead to a larger trading volume and economies of scale for the govt. as well.

- Capex across Defence and Infrastructure, along with requisite subsidies, can bring inward investment in the form of technology and capital from Domestic and Foreign Investors

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