India attracted the highest level of foreign investment so far in August compared to emerging and developed markets, even after key stock indices declined eight times during the past 14 trading sessions.
Foreign investors put in $1.11 billion in domestic equities in August so far, while pulling out their investments from other markets. Taiwan posted the highest outflows at $3.9 billion, followed by Brazil with $1.74 billion, Indonesia and South Korea with about $1 billion each, and Thailand and South Africa at about $350 million each in selling by foreign institutional investors.
Year to date, FIIs bought about $16 billion in local equities while since April 1, they bought $19 billion, according to SEBI data.
Amit Pabri, a senior analyst with CR Forex, said FIIs have shown a positive inclination in their investment patterns. Their allocation is at 20 percent of the average levels in the previous three months. The significant contrast between FII flows and the Nifty index movements can be attributed to global uncertainties.
Recently, major global credit rating companies downgraded the US and its banking sector. Simultaneously, concerns arose about China's real estate sector, particularly about Country Garden, prompting a selloff by hedge funds. Regulatory actions stabilised the situation, but pressure remained on Chinese equities, intensified by Evergrande's bankruptcy filing.
Consequently, foreign investors are shifting investments towards the promising Indian market, analysts said.
Domestic challenges
Meanwhile, domestic equities face several challenges. Global uncertainty, rising domestic inflation, and profit booking have all cast shadows. In response, foreign investors are diversifying into India for stability amid global intricacies, analysts said.
Ajay Bodke, an independent market analyst, said India's growth prospects, in contrast to China’s, remain strong, thanks to a resilient investment and real estate cycle, supported by low levels of non-performing assets. This positive trajectory is supported by India Inc.'s consistent earnings performance, expectations of a continued pause by the Reserve Bank of India on increasing interest rates, and stability of the rupee, all contributing to positive FII buying despite declines in local equities.
Brokerages anticipate robust growth in India in the second quarter of 2023. Many of them share the view that the chance for rate cuts is restricted and the RBI is expected to hold its stance for the entire financial year. The April-June quarter GDP data will be put out on August 31. According to the RBI's forecast, GDP growth may have risen further to 8 percent in the second quarter of 2023.
The Indian markets have entered a corrective phase since August after a strong rally. Analysts suggested a significant decline is unlikely as recent gains have positioned the markets for consolidation.
According to Kotak Institutional Equities, the strong macroeconomic foundation, improvements in consumption sectors, and a positive perception of India act as safeguards against market downturns. However, elevated valuations across sectors are expected to limit further upward potential.
India's flagship stock indices, the Sensex and the Nifty, both registered declines of almost 2.4 percent each so far in August, the first monthly fall after five straight months of gains. The decline was the sharpest since December 2022.
Additionally, the BSE MidCap index fell 0.1 percent while the BSE Smallcap index rose almost 1 percent. Since March 28, the Sensex and the Nifty have jumped about 13 percent each, while the midcap and smallcap indices have rallied about 30 percent and 35 percent, respectively.
ICICI Securities Data for July 2023 shows that foreign portfolio investors sustained their purchases of high-risk stocks, primarily associated with cyclical and capital-intensive sectors (financials, industrials, discretionary consumption, energy).
Meanwhile, the recent surge in US bond yields have sparked concerns of acceleration in FPI outflows from the Indian markets. However, brokerage firm ICICI Securities believes that these concerns might not have a solid basis. "The most recent surge in US yields from ~3.75% to ~4.3% was triggered by the rating downgrade by Fitch and is putting pressure on FPI flows towards India. However, the US 10-year bond yield is likely near its upper range given the outlook for inflation. This should alleviate concerns around FPI outflows even as structural domestic equity flows in India continue to be positive as evidenced by record-high SIP flows", ICICI Securities report added.
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