Foreign investors invested heavily in Indian equities in 2019. Foreign institutional investors (FIIs) pumped in $14.47 billion in Indian stocks so far during the year, the highest in last five years, according to a Mint analysis. In 2018, they were net sellers of Indian equities worth $4.62 billion. FII inflows in equities were worth $16.16 billion in 2014. FIIs also invested $3.72 billion in debt instruments during the year, which is much better than the outflow of $9.36 billion last year.
FIIs were bullish on Indian equities for a variety of reasons, according to analysts at BNP Paribas. What works in favour of India is its relatively high long-term earnings growth potential, along with low earnings volatility. Second, ease of stock selection and availability of a diverse range of sectors to invest in remains a bright spot for India.
“Indian equities are one of the rare compounders in the Asian universe...We believe these factors explain why India is almost always a key recipient of large FII flows in any episode of FII flow revival into Asia. The present episode is no exception," said Manishi Raychaudhuri, head of equity research, Asia-Pacific, BNP Paribas.
The shift in stance on monetary policy outlook by various central banks led to an improvement in global liquidity. This, along with expectations of a positive outcome of the US-China trade talks, bolstered risk-on sentiments among foreign investors who diverted huge investments towards emerging markets.
The steady flow of foreign money into India had hit a major setback in July after the introduction of an additional surcharge on foreign portfolio investors in the budget, which triggered a massive sell-off in Indian equities. However, the government rolled back the surcharge in the latter part of September and announced a slew of stimulus measures, including the reduction of corporate taxes.
Domestic institutional investors, including mutual funds and insurance firms, were net buyers of Indian stocks worth ₹41,643.48 crore in 2019, while in 2018 it was at a record high of ₹109,364.13 crore.
“The strength of domestic flows partly explains why markets like India have been so resilient this year despite large foreign outflows in first half of 2019. In both India and Thailand markets, over the past 7-8 years, domestic flows have gone against FII flows, supporting the markets during periods of FII selling," he said.
According to Raychaudhuri, in India, a lack of investment alternatives with decent return opportunities and regular systematic investment plans have raised domestic flows. In 2019, the flows were hindered by weak exports led by global trade disputes and the transition period during government formation after the 2019 election.
Overall benchmark indices, the Sensex and the Nifty, were up 15.2% and 12.8%, respectively, in 2019, their best performance since 2017. Mid- and small-cap indices were weak, but losses narrowed in 2019.