Excess liquidity, attractive valuations and weakness in the US dollar propelled foreign investors to flock to the Indian stock market in a big way with the highest-ever net inflow of ₹1.4 lakh core in 2020, but they also dumped debt securities worth a record amount amid pandemic-driven stress in the economy.
The foreign portfolio investors (FPIs) have made a net outflow of a little over ₹1 lakh crore in 2020 so far, though hybrid instruments witnessed a net inflow of more than ₹10,000 crore, as per the latest data available with depositories.
The market men expect a similar trend to continue for a few months unless there is a major change in the overall investment scenario.
"With some major developments on COVID-19 vaccine front, India stands to benefit. Also, growth in the economy will improve investor sentiments and their outlook towards India. From the risk-reward profile perspective, these aspects make India a good investment destination," said Himanshu Srivastava, Associate Director – Manager Research, Morningstar India.
However, if the economy remains weak for a longer period of time, that could be a big deterrent. Also, if there is another wave of the coronavirus pandemic resulting in re-implementation of lockdown measures, that could dampen sentiments and turn foreign investors risk-averse, he added.
As the year 2020 draws to a close, the FPIs have so far made a net inflow of ₹1.42 lakh crore -- the highest level of such investment in a calendar year since 2002.
This is the fifth time in history when net investment by foreign investors in equities has crossed ₹1 lakh crore mark in a year. Prior to this, the feat was achieved in 2019, 2013, 2012 and 2010, when overseas investors infused a net sum of ₹1.01 lakh crore, ₹1.13 lakh crore, ₹1.28 lakh crore and ₹1.33 lakh crore respectively.
On the other hand, debt markets have seen FPIs turn net sellers in 2020 as they withdrew a massive amount of ₹1.07 lakh crore from debt, however, they invested a net amount of ₹23,350 crore in debt-VRR. The voluntary Retention Route (VRR) channel was introduced by the Reserve Bank of India (RBI) in March 2019 to attract long-term and stable FPI investments into debt markets.
Broadly, investments through this route are free of macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retaining a required minimum percentage of their investments in India for a certain period.
The year 2020 marked the biggest outflow by foreign investors from debt markets since 2002, when bifurcation of net investment data became available.
The previous record outflow was in 2013, when FPIs pulled out a net sum of ₹50,849 crore from debt markets. Also, an exodus to the tune of ₹47,795 crore was seen from such instruments in 2018.
Taking all asset classes together, FPIs have made a net investment of ₹68,200 crore (USD 9.3 billion) in the Indian capital markets (equity, debt, debt-VRR and hybrid) so far in 2020, while a few days of trading is yet to take place.
While FPIs have made gross purchases worth ₹20.7 lakh crore so far this year, they have sold securities worth ₹20 lakh crore across all instruments.
In comparison, the net inflow into Indian capital markets was at ₹1.36 lakh crore in 2019. This comprised a net investment of ₹1.01 lakh crore in equities, ₹25,880 crore in debt and around ₹9,000 crore in hybrid securities.
Experts said availability of excess liquidity in the global financial market, attractive valuation compared to developed markets, and weakness in the US dollar have supported buying in Indian equities.
Nirali Shah, Senior Research Analyst at Samco Securities, said that 50 per cent of foreign inflows in India have been through qualified institutional placements (QIPs) and strategic stake sales such as the HUL-Glaxo deal and the remaining half have been through secondary market purchases.
A large factor for the massive inflows could be the weakening of the dollar which has caused a shift in money towards emerging countries given their interest rates are at the lower end and the inflation-adjusted return is much higher, she added.
According to Morningstar's Srivastava, one of the primary reasons for investment in equities is the availability of excess liquidity in the global financial markets with major central banks announcing stimulus packages to bring their economy back on track.
India is not the only emerging country to experience a gush of foreign inflows and other emerging markets have also witnessed robust investments in proportion to their weights in the world economy.
"India has attracted more than a fair share of emerging market inflows due to stronger than expected economic recovery, moderation in active COVID-19 cases since mid-September and a supportive policy framework in terms of an accommodative monetary policy and a fiscal push on promoting manufacturing sector," said Gaurav Dua, Senior Vice President – Head Capital Market Strategy & Investments, Sharekhan by BNP Paribas.
Also, FPI flows got a boost from a positive surprise in second-quarter corporate earnings and some structural reforms in labour, agriculture and financial sectors, said Alok Agarwala, Chief Research Officer of Bajaj Capital.
"The government initiatives to attract FPI/FDI investors through hosting investor conferences, making structural changes to provide ease of doing business, announcing long-term measures like Production Linked Incentives (PLI) under AatmaNirbhar Bharat have resulted in positive flows into India," said Divam Sharma, co-founder at Green Portfolio.
On the other hand, foreign investors do not appear positively inclined towards Indian debt securities in the current scenario. In fact, a massive shift has been seen from debt to equities as stock markets have witnessed a higher than expected recovery rate.
"Debt market has been in turmoil lately due to the rising credit risk. Given the stress in the economy and limited scope for further rate cuts, equity markets offered much better opportunity post the sharp correction earlier this year and that resulted in an outflow from debt markets," Dua said.
Green Portfolio's Sharma said the spread of government securities (G-Secs) with corporate bonds has narrowed, resulting in the selling of debt instruments by FPI.
Further, the cost of funds of government and corporates has moderated on the back of RBI's monetary easing and liquidity infusion, making the debt markets less attractive due to falling yields.
Sector-wise, banking, financial services, IT and FMCG have attracted higher inflows from FPIs.
According to Sharma, there is an increasing conviction to invest in technology solutions as people continue to work from home, consume more online and reduce physical contact.
When it comes to investing in equities, it was a good year to start with as FPIs put in nearly ₹14,000 crore in stocks during January-February. They went on a selling spree in March as they sold net assets worth ₹62,000 crore, largely a result of the coronavirus outbreak and ensuing risk-averse environment.
Uncertainty over the gravity of the pandemic's impact on the global economy and financial markets worldwide triggered a flight to safety among foreign investors as they rushed to exit from relatively riskier investment destinations, such as emerging markets like India.
The sell-off continued in April, although the pace of net outflow came down significantly on measures announced by the government and the RBI periodically to revitalise the sagging economy.
FPIs made a comeback in May and the positive momentum continued till August as they pumped in a net amount of ₹91,000 crore during the period under review.
This could be attributed to an attractive valuation of the Indian equities after the sharp correction in March and significant depreciation of the Indian rupee against the US dollar, which provided FPIs a rather good entry point.
Furthermore, the lifting of lockdown curbs and the government's efforts to kickstart economic activity in the country also garnered positive response from foreign investors.
Certain technical factors including the over-subscribed rights issue of Reliance Industries also attracted significant foreign flows.
The scenario, however, reversed in September as FPIs turned net sellers in equities. The outflow was triggered largely by concerns over the country's economic growth and rising border tensions between India and China.
The country's gross domestic product contracted by a huge 23 per cent for the quarter ending in June 2020, denting the investor sentiments. Foreign investors also stayed on the sidelines as COVID-19 cases in Europe and other countries renewed fears of a possibility of new lockdowns, thus dashing hopes of any swift economic recovery.
However, the opening of the domestic economy, resumption of business activities, better-than-expected quarterly results and a fall in India's COVID-19 active case count helped bring back the foreign investors into Indian equities in October, November and December.
Going ahead, Bajaj Capital's Agarwala said the pace and sustainability of earnings recovery (as displayed in Q2FY21) and global liquidity situation are the key factors that will determine FPI flows in Indian equities in 2021.
He further said FPI flows in Indian bonds are likely to recover once real interest rates turn positive, which is unlikely to happen before the fourth quarter of the current fiscal.
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