Foreign investors increased their holdings significantly in Indian companies in the last three months of 2019 as stock markets showed healthy returns in the quarter.
Foreign institutional investor (FII) holdings in 409 firms in the BSE 500 index, which contributes nearly 90% of India’s aggregate market capitalization, was at 13-quarter high by end of December.
FII ownership rose to 21.03% in December, Capitaline data showed. This is higher than the 20.71% stake held by FIIs in these firms in the September quarter and 20.09% in December quarter of 2018. In October-December, the benchmark Sensex index rose over 6%, which perhaps explains the foreign liquidity driving the equities. FIIs had bought $6.07 billion of Indian stocks in the same period after sharp-sell off in previous months due to a slew of unfavourable steps the government announced in July.
Measures announced mid-September last year, considered as boosters to the sagging economy, gave confidence to FIIs to park more money here, analysts said. After the government cut corporate tax rate to 22%, most analysts had expected the strong monetary stimulus in near term to result in a cyclical recovery followed by investment/exports-led growth in medium term. “Relaxation of additional surcharge on foreign portfolio investment and reduction of corporate tax led to expectations of corporate supported foreign buying into India," said Himanshu Srivastava, a senior research analyst and a manager research at Morningstar.
Srivastava also said the accommodative monetary policy stance by US Federal Reserve made emerging markets attractive for foreign investors.
Manishi Raychaudhuri, Asia Pacific equity strategist, BNP Paribas, said India is almost always a key recipient of large FII flows in any episode of FII flow revival in Asia. “...ease of stock selection and availability of a diverse range of sectors to invest in remains a bright spot for India," he said in a note on 14 December. Continued rate cuts and a newly begun quantitative easing by the US Federal Reserve, and an ongoing liquidity expansion by other frontline central banks are key potential catalysts for a revival in FII flows, he said.
Srivastava is also hopeful that steps announced in budget will aid foreign investments. “Prominent among them are the increase in FPI limit in corporate bonds to 15% from 9%, and removal of dividend distribution tax structure as the dividend shall now be taxed in the hands of the recipients at their applicable tax rate," he said.
Meanwhile, domestic institutions resorted to selling equities in the period. Data showed holdings of domestic mutual funds and insurance firms in the 409 companies of the BSE 500 were marginally lower in the quarter. At the end of December, domestic institutions held a 13.44% stake in these firms from 13.46% at the end of September and 12.79% a year ago. In December quarter, DIIs were net sellers of Indian shares worth ₹3,981.29 crore.