Net buying by FIIs in Indian equities follows a sell-off to the tune of $4.13 bn in July, August
The dovish signal on rates and liquidity by central banks halted the outflows from EMs, say analysts
India seems to be back in favour among foreign investors with the government announcing fiscal stimulus measures to boost market confidence. After aggressive selling in the previous months, foreign institutional investors (FIIs) have bought Indian shares worth $1.04 billion in September, the highest monthly inflow since May.
Investor sentiment about India turned positive after a slew of measures were taken by the government to lift the sagging economy. In September, the government unexpectedly reduced corporate tax rates leading to foreign brokerages upgrading ratings on India, while earnings estimates of companies were also increased. The net buying by FIIs in Indian equities in September follows a sell-off to the tune of $4.13 billion in July and August.
In the Union budget on 5 July, the finance minister had proposed an increase in surcharge on income tax for the ultra-rich, a move that affected FPIs as well. However, the higher surcharge was later rolled back.
In 2019, FII monthly inflow was the highest in March when they were net buyers of $6.14 billion of Indian shares. In May, they were net buyers of shares worth $1.42 billion.
Analysts said the dovish signal on rates and liquidity by global central banks, including that of India and China, halted the sharp portfolio outflows from emerging markets, including India. It also paused the sharp depreciation in emerging market currencies.
The Indian rupee has strengthened by 0.76% in September, while other EM currencies, such as the Russian ruble and South Korean won, gained 1-2.7%.
Vinod Karki, vice-president (strategy), ICICI Securities Ltd, said: “Implementation of monetary easing stance by global central banks like US Federal Reserve has resulted in flow of foreign money back into EMs including India. Escalation of trade war between US and China in previous months also dented FIIs sentiment towards equities."
According to Michael Strobaek, global chief investment officer, Credit Suisse, recent weeks have seen political risks in Europe diminish, while the US and China made renewed efforts to resume talks.
“Accommodative central banks should further underpin investor sentiment," he said in a note on 12 September.
The US Fed slashed interest rates by 25 basis points (bps) to sustain a record-long economic expansion, but signalled a higher bar to further cuts in borrowing costs, eliciting a quick rebuke from US president Donald Trump. Higher interest rates in the US generally lead to outflow of foreign funds from emerging markets, considered to be riskier assets, while it may be a reversal of funds outflow to EMs in case of lower interest rates in the US.
Meanwhile, Karki also said that the government’s fiscal measures, including removing higher tax proposals, added to the positive sentiment.
Foreign brokerages have upgraded their targets for benchmark indices, with most re-rating India to overweight, stating that the measures have significant positive implications for corporate profitability, the broader economy and market valuations.
Morgan Stanley expected India’s earnings growth revisions to turn sharply positive after almost nine years of downgrades.
The brokerage has raised its Sensex target to 45,000 from 40,000 in June 2020.
It also raised its earnings growth estimate from 20% to 23% in FY21. “We think that the corporate tax cuts create room for improved earnings growth. The combination of monetary and fiscal stimulus should help revive India’s growth rate, and the so far elusive new earnings up-cycle is likely to have begun," Morgan Stanley said in a report on 22 September.
All eyes are now on the Reserve Bank of India’s monetary policy review on 4 October, and most economists expected another cut in key interest rates.
In September, FIIs were net sellers in debt worth $106.58 million, while domestic institutional investors were net buyers of shares worth ₹53,314.23 crore.