FIIs’ capital inflows into Indian equities during 1 June to 26 June came at $2.87 billion, highest ever in the year
This inflow drove markets over 8% higher in June, beating both MSCI EM and MSCI World indices in the month.
MUMBAI: Foreign fund flows into India significantly improved during 1 June to 26 June period even as concerns over steep valuations and weak fundamentals remain. An unprecedented amount of fiscal and monetary stimulus and gradual reopening of economies post lockdown kept sentiment intact worldwide and the Indian markets have been a major beneficiary of that.
Foreign institutional investors’ (FIIs’) capital inflows into Indian equities stand at $2.87 billion in June, highest ever in the year. FIIs have been gradually allocating money into Indian shares with an inflow of $1.71 billion in May after a massive March-April selloff of $8.42. This inflow of foreign money also drove Indian markets over 8% higher in June, outperforming both MSCI Emerging Markets (EM) and MSCI World indices in the month.
Among sectors, FIIs infused the highest amount of money into financial services at $1.57 billion while they sold the most in telecom services with net outflow of $559 million in first 15 days of June, as per data available with National Securities Depositary Limited.
According to Prasanna Pathak, Head of Equity, Taurus Mutual Fund, large easing and printing of money by global central banks have led to surge of liquidity and money was trying to find its way into various asset classes including emerging markets like India. “This was the main driver for June fund flows. Also, some long-only money would have also come, which found the sharp correction as a good long-term buying opportunity," he said. The G4 central banks pumped in massive liquidity of $6 trillion as a cohesive response to fight covid-led disruptions. The G4 central banks are the Bank of England, the Bank of Japan, the Federal Reserve and the European Central Bank.
Pathak believes that FIIs may continue to bring-in money into India as long as incrementally global fund-flow and money printing by central banks continues. “Also, a lot will depend on how the recovery in the economy shapes up, how the geopolitics evolves, and also how the covid-situation/global events unfold. FII have tended to be short-term and trading oriented in recent times driven largely by hedge funds and arbitrage money," he added.
However, Aishvarya Dadheech, Fund Manager, Ambit Asset Management cautioned that only concern which can derail the foreign flows in to India could be the risk of sentiment, caused by a second covid-19 wave, globally, and if India doesn’t plateau its covid cases early, and the economic recovery hits the wall again. "Most important thing to note is that March witnessed a lot of hot money moving out, but May and June witnessed more of long-only exchange traded fund (ETF) buying, which is more stable money," Dadheech said.
On the debt side too, FIIs sell-off has moderated massively in June. In the current month, FIIs were net sellers of debt instruments worth $379.67 million while May saw an outflow of $2.711 billion in Indian debt instruments.
Lakshmi Iyer, chief investment officer, debt and head - products, Kotak Mahindra Asset Management Company, said that the reason for a moderate outflow of foreign money from Indian debt is stabilization of Indian currency and bond yields. "Also, we have seen rates ease across tenors leading to capital gain on such bonds. Hence the outflows in June have moderated. The possible inclusion of India in the EM bond index could act as a catalyst to reverse the negative net sales," she said.
In June, the Indian currency depreciated 0.04% against the dollar but is down 5.64% in 2020 so far.
Meanwhile, domestic liquidity in Indian shares is tapering off. Domestic institutional investors (DIIs) have sold shares worth Rs626 crore in June after an inflow of Rs11,355.93 crore in May. In this year so far, they have infused money worth Rs8,5821.68 crore in equities.
Liquidity will be critical to maintain buoyancy in stock markets as investors gear up for a weak June quarter corporate results.