FPIs invest over ₹21,000 crore in the Indian financial market in May so far; can the momentum sustain?

Foreign portfolio investors (FPIs) have been bullish on the Indian market since March this year which has underpinned domestic market sentiment significantly. According to data available with NSDL, FPIs have infused about ₹21,294 crore in the Indian financial market in May so far against ₹13,545 crore in April and ₹5,899 crore in March. For the calendar year 2023, FPIs have invested ₹10,055 crore in the Indian financial market.

The return of FPIs can be attributed to India's economic resilience. Falling crude oil prices and the prospects of a pause in rate hikes by the US Fed have also facilitated foreign capital inflow.

Read more: FPI-driven market bets on Fed pause

"Appreciating the rupee is one of the reasons why FIIs have turned buyers. India’s declining trade and current account deficits are likely to strengthen the rupee further. Also, FIIs have changed their strategy of 'sell India, buy China' which they pursued in January and February," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"The global economy/ market construct also is favourable for FII inflows. Market indicators suggest that both Fed and the RBI are close to the peak in the present rate hiking cycle. Rate cuts are possible towards the end of 2024," Vijayakumar said.

Indian economy is expected to remain one of the fastest-growing large economies in the world in 2024 which will likely keep foreign investors glued to the country.

As Kedar Kadam, Director – Listed Investments at Waterfield Advisors pointed out that in its latest update, the IMF raised its forecast for Asia-Pacific, stating that the region’s growth will be primarily driven by China’s recovery and resilient growth in India.

While a healthy economic outlook is a positive factor, the anticipation of the end of aggressive rate hikes is adding confidence to FPIs for emerging markets.

Some analysts believe India is witnessing favours from the world because of the strong chatter around the 'China plus one' strategy. Many reputed companies are coming to India to establish their manufacturing units which are also acting as a catalyst for FPI investment in the country.

"India has also got favourable coverage from respected publications like Economist, Barrons, etc. over the past few weeks. Also, a lot of foreign companies have come to India or are showing great interest in coming to India to set up businesses in their China+1 strategy. China's economy has recently shown a resurgence but the extent thereof has disappointed investors so far," said Deepak Jasani, Head of Retail Research at HDFC Securities.

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Can FPI momentum sustain?

There are two major factors that can reverse the current FPI trend- stretched valuation of the Indian equities and macroeconomic shocks resulting in further rate hikes.

"Nifty is presently just 3 per cent away from the all-time-high of 18,887. Market momentum can take the Nifty towards an all-time high. But at that level, valuations will be stretched. Moreover, worse-than-expected CPI inflation data from the US can trigger fresh fears of further rate hikes by the Fed. This can reverse the uptrend," said Vijayakumar.

On the other hand, Jasani believes the prevailing situation could continue till the third and fourth week of May and later the US debt default situation could determine the future inflow and outflow condition.

He said though Indian markets are not cheap by historical standards they are neither expensive. The Q4 results from large companies (except IT) have not disappointed. FPIs are making good on their neglect in January and February and taking a favourable view of India.

Even on the policy and political front, India does not have any near-term threat which is a positive factor for the domestic economy.

"A slew of upcoming elections in emerging markets (Turkey, Pakistan, Thailand, Argentina, Poland) will add pressure on flailing bonds, stocks and currencies, but India's general elections are a year away and hence India does not show such weaknesses," said Jasani.

Vikram Kasat, Head Advisory at Prabhudas Lilladher believes FPI momentum will sustain because of Indi'a economic growth.

"FPIs are here to stay because a major slowdown in growth is expected in US and Europe while India’s GDP is likely to grow at about 6 per cent in the FY24. In a world where rate hikes are not taking a pause, India has managed to deal with inflation with a pause in rate hikes," said Kasat.

Kasat also believes Indian markets may generate 10 per cent returns in this financial year even after facing huge global headwinds where other countries are still tumbling to manage with inflation slowdown.

Kadam of Waterfield Advisors underscored that the world economies are going through challenging times driven by factors such as higher interest rates and inflation, geopolitical tensions, national debt crisis, unfavourable demographics and political unrest. But India’s potential to grow extraordinarily with its resilient and stable macros (attractive demographics, political stability, momentum in capex cycle and tax collection, China+1 opportunity, PLI schemes) makes it one of the most attractive bets for FPIs.

"Although we do not expect India to remain fully immune to the global macro downturn, it is certainly well placed to absorb any material global shock. Hence, we believe FPI momentum in Indian equities should continue though volatility is not ruled out," said Kadam.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.