Domestic flows impel FPI investment in India to record high this year

FPI investment in the calendar through 28 December is at a record  ₹1.71 trillion,
FPI investment in the calendar through 28 December is at a record 1.71 trillion,

Summary

  • The mammoth investment by institutional and retail investors has pushed up the benchmark Nifty by 20% and the key midcap and smallcap indices by 44% and 48% respectively

The year 2023 belong to the domestic investor, whose faith in the Indian stock market acted as an effective counterweight to the intermittent outflows by foreign portfolio investors (FPIs), on account of rising global interest rates. This compelled FPIs, gripped by FOMO, to re-enter the market at the fag end of the year, posting the highest inflow in any month to date of 66,135 crore in December. 

Their investment in the calendar through 28 December is at a record 1.71 trillion, still short of the domestic institutional investor’s 1.85 trillion, and the direct investor’s 8,700 crore on NSE from April-November.

This mammoth investment by institutional and retail investors pushed up the benchmark Nifty by 20% and the key midcap and smallcap indices by 44% and 48%, respectively. While this has catapulted valuations of all three indices above their five year median–the Nifty one-year forward PE at 20.18 times, above the five-year median of 17.93, looks relatively more modest to the Nifty Midcap 150 and Nifty Smallcap 250 indices’ valuations of 27.63 (21.48) and 21.64 (15.5), and is poised to outperform its smaller peers.

The odds of policy continuity have shortened even more after the NDA’s state assembly election wins recently in the three Hindi heartland states. It was the senior leadership led by Prime Minister Narendra Modi who campaigned in these elections, resulting in markets pricing in a potential for peoples' overwhelming mandate for the NDA in the May 2024 general election.

Apart from the overall market, this is likely to give a further boost to the PSU sector shares, reflected by the thematic Nifty CPSE index jumping almost 75% year-on-year to 4,860 currently.

Demat accounts with NSDL and CDSL increased from a combined 10.81 crore last year to 13.5 crore in 2023. Given a population size of 144 crore, the scope for increased participation is immense, especially with India's real GDP growth forecast at 7% making it an outlier globally. Add to this the expectations of rate cuts by global central banks, the year ahead looks more promising.

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