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Business News/ Markets / Stock Markets/  FPI flows to drive markets as US seen at interest rate peak

NEW DELHI : Foreign portfolio investor inflows were robust, providing crucial support to the Indian markets. In May, FPIs showed their confidence by purchasing equities worth 41,206.76 crore. This trend continued into June, despite domestic institutions opting to secure profits and selling equities worth 3,306 crore in the previous month.

Analysts anticipate FPI flow to remain a key driving force in the near future. Notably, interest rate hikes in the US to combat inflation may have reached a peak. Consequently, emerging markets like India are seeing a surge in capital inflows. According to analysts, Reserve Bank of India (RBI) is expected to maintain a status quo on interest rates in its June review and there is a very slim chance of the US Federal Reserve resorting to a 25 basis point hikes yet again.

Graphic: Mint
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Graphic: Mint

“We expect RBI to maintain status quo on policy rates in the upcoming policy meeting. Even for the US Fed policy, the market is considering a modest chance of a 25bps rate hike, with most participants expecting the US Fed to pause the upcoming meeting" said Nishit Master, portfolio manager, Axis Securities PMS. “The events will not have a significant bearing on the trajectory or quantum of FPI flows in India, or other emerging economies," he added.

“The global bond yields are moderating in anticipation of a halt in interest rate hike. The trend is encouraging investments across emerging market equities, and India stands to benefit due to its improved fiscal and margin outlook," said Vinod Nair, head of research at Geojit Financial Services.

India’s growth outlook has helped drive FPI inflows, riding on improved Q4 earnings of India Inc., expectations of strong gross domestic product (GDP) growth, narrowing deficit (fiscal and current account) are all favourable for FPI inflows. In addition, robust domestic PMI figures, sequential growth in automobile sales, and robust expansion in bank credit are instilling investor confidence, analysts added.

A key factor behind India’s notable outperformance compared to global equities is the reduction in the valuation premium of Indian markets relative to emerging market indices in the past year. This development is viewed as a positive driver for domestic market performance. “Considering the rationalized valuations, strong earnings growth and, more importantly, peaking out of interest rates, we expect the FII inflow trend to continue." Sushant Bhansali, chief executive officer, Ambit Asset Management, said.

Other factors are fizzling out of growth impulse in China since the opening of the economy post-covid, besides lower commodity prices, especially for energy, said analysts.

“Commodity importers like India, Taiwan and South Korea have seen good amount of FPI inflows in May, while other emerging economies, which are commodity exporters such as Brazil and Malaysia, have seen outflows," said Master.

FPIs inflows are supported by the decline in international commodity prices, which will have positive impact on India’s fiscal situation, and corporate earnings, said Nair. In the past two months, crude oil, copper, and steel saw price correction. This will boost profit margins on a sequential basis, and local demand is likely to remain stable, resulting in instant earnings growth, he added.

However, if the Fed raises rates, we may witness outflows from the emerging markets, including India, albeit it will be short-lived, according to our understanding, said Master.

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Ujjval Jauhari
Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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Updated: 05 Jun 2023, 11:39 PM IST
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