Rare sighting: FPIs turn net buyers of Indian stocks for second straight day

“Change in FII strategy to buying will be a big relief to the market. At higher levels, when valuations again get stretched, there can be renewed selling in the market,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

The stock market has fallen over 15 percent since October 2021 and hence valuations have turned comfortable at 18 times one-year forward earnings, which is at a 7 percent discount to its 10-year average price-earnings ratio of 19.5 times, according to  analysts.

Analysts said the Dollar Index declining to 106.61 from the highs of above 108 has also boosted global market sentiment. With this, FIIs can be expected to start buying again. There is valuation comfort in segments like financials and IT. Autos, FMCG and capital goods are likely to do well, analysts added.

FII buying started in the wake of favourable domestic dynamics which included softening commodity prices, crude oil falling below $100 a barrel, an improvement in the monsoon, strong quarterly earnings and an expected slow pace of rate hikes by the Reserve Bank of India relative to its supersized hikes earlier. Analysts expect the central bank to raise the repo rate by 25 basis points to 5.15 percent at its August 4 review.

“Earnings season began on a healthy note, indicating that the companies are managing the raw material inflationary pressure pretty well despite the full-blown impact of high commodity prices this quarter. We believe that once the full impact of inflation becomes clear on corporate earnings by the end of this results season, FII selling would reverse,” said Sneha Poddar, AVP and research analyst, broking and distribution, Motilal Oswal Financial Services.

Prashant Tapse, vice-president (research), Mehta Equity, advises investors to watch the RBI and Federal Reserve meetings which will give more direction for the markets. The next Fed meeting will be on July 26-27.

However, the slowdown in the pace of FPI selling has also come in conjunction with low institutional participation in the market. Domestic institutional investors, too, have moderated their pace of buying as they have so far net bought stocks worth Rs 8,110 crore against Rs 45,615 crore in June.

On the National Stock Exchange, the average daily turnover has declined 3 percent in July on a month-on-month basis so far while it is down 25 percent from the levels seen in May.

Analysts expect markets to remain under pressure ahead of the key central bank events. Both the Sensex and Nifty have risen nearly 5 percent each so far this July. The Nifty MidCap and Nifty SmallCap have advanced nearly 9 percent and 8 percent, respectively, so far in July.

“We expect a mixed trend to continue in terms of FII selling and buying over the near term. However, we expect a complete trend reversal in the second half of FY23 with FII inflow returning completely in the Indian equity market, while the DII (domestic institutional investor) investments would continue supporting markets,” said Mitul Shah, head of research at Reliance Securities.