Indian stock market to witness volatile FPI inflow amid US Fed rate cut; earnings growth key driver, say analysts
- Indian stock market garnered premium valuations and attracted foreign investments during periods of robust earnings growth, typically around 25%. However, this growth has moderated to approximately 15%, resulting in an anticipated reduction in premium valuations and subdued inflows, analysts said.
The Foreign portfolio investors (FPIs) have been net buyers in the Indian markets in March so far, after selling big in January and modest buying in February. The FPI inflows into Indian equities have been more than ₹39,000 crore this month, as per NSDL data.
The behavior of overseas investors has been characterized by erratic fluctuations, likely influenced by movements in US Treasury yields. With the US Federal Reserve anticipating three interest rate cuts this year, the trajectory of foreign institutional investors (FIIs) and FPIs in Indian equities is anticipated to remain volatile.
Vinod Nair, Head of Research, Geojit Financial Services believes that FII flows will be more influenced by the trajectory and aggressiveness of interest rate reductions in the United States.
“The FIIs have turned positive in the Indian markets this month and we expect this trend to continue in the short-term. The overseas investors are employing a risk-on and risk-off strategy. Analysis of their investment behavior suggests that when FIIs are buying in Indian markets, they are concurrently selling from other emerging markets; conversely, when they are buying in other markets, they are reducing their exposure in India,” said Vinod Nair.
Nevertheless, the primary determinant of foreign fund inflows into Indian markets remains the trajectory of earnings growth.
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Nair observes that Indian markets garnered premium valuations and attracted foreign investments during periods of robust earnings growth, typically around 25%. However, this growth has moderated to approximately 15%, resulting in an anticipated reduction in premium valuations and subdued inflows.
“We do not expect the FII inflows to improve drastically. We should rather have a selective approach, focusing on a stock-to-stock basis. Despite this, Indian markets will continue to see stable FII inflows supported by strong domestic investors’ participation, he said.
Moreover, political stability after the Lok Sabha elections 2024 will also be a key trigger for the foreign fund inflows into the Indian market.
Atul Parakh - CEO, Bigul expects the anticipated Fed rate cuts to potentially boost foreign investor confidence in Indian equities, however, the trajectory of FII/FPI flows will depend on factors like US Treasury yields, India's economic recovery, and corporate earnings growth.
Speaking on sectors that will remain in focus going ahead, Nair remains bullish on FMCG, infrastructure and industrial/manufacturing sectors.
“We remain positive on the FMCG sector on expectations of normal rainfalls which would aid the agriculture sector and lead to moderation in input costs and improve rural demand for consumer companies. The valuations in the FMCG sector have also consolidated well recently and we expect these stocks to perform better,” Nair said.
He has a mixed view on cement companies as he believes the valuations of some stocks in this space are expensive. He remains positive on large-cap IT stocks such as LTI Mindtree, Tech Mahindra, and Infosys.
Meanwhile, Parakh expects sectors like IT, banking, manufacturing (pharmaceuticals, automobiles, capital goods), renewable energy, and consumer discretionary are likely to have FII attention.
“Companies with strong fundamentals, export potential, and exposure to emerging technologies or sustainable investments may attract heightened FII interest. Nonetheless, a thorough analysis of risks and market conditions remains crucial for informed investment decisions,” Parakh said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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