After selling for two consecutive months, foreign institutional investors (FPIs) have done strong buying in the Indian financial market in the month of June.
NSDL data shows, FIIs have net invested Rs 14,137 crore in the Indian market in June so far. They had taken out Rs 8,836 crore in April and Rs 1,958 crore in May from the Indian market. In the year 2021 so far,
they have pumped in Rs 59,010 crore on a net basis.
As per a report by brokerage firm Emkay Global, FIIs turned buyers in energy and diversified financials sectors while they continued buying in capital goods and banks in the first half of June.
Banks have seen about $1 billion inflows in the past one month, Emkay Global pointed out.
"Only a handful of sectors saw outflows in the first half of June. FIIs turned sellers in transportation while they continued selling in software and services and food, beverage and tobacco sectors," Emkay said.
What facilitated the inflow?
India received record flows from October 2020 to March 2021 due to positive global sentiments, strong rebound in the Indian economy and better-than-expected quarterly earnings.
However, the second wave of COVID-19 made the outlook of the market hazy which led the FIIs to sell-off in Indian equities in April and May.
Due to a decline in new cases, there has been a gradual relaxation in lockdowns since the first week of June which is leading to a rebound in economic activities.
While Q1FY22 numbers are going to be adversely impacted due to the second COVID wave, markets are factoring in normalisation of the economy by the end of Q2FY22. As a result, we have seen investor sentiments turn positive which is resulting in strong FII inflows in June, said Jyoti Roy, DVP Equity Strategist, Angel Broking.
Trend may sustain but risks persist
Market analysts now believe that the Indian market may continue to see FII investment going forward as the COVID-19 cases have fallen significantly and the vaccination has given confidence that the economy will soon see a rebound.
"The month of June has seen decent buying from FIIs and we believe the trend could continue on the back of easing restrictions and increase in the pace of vaccination," said Ajit Mishra, VP - Research, Religare Broking.
"Strong government support and dovish monetary policy would aid further flows. Having said that, any risk-off sentiment globally and currency headwinds could impact the flows," said Mishra.
Roy also believes that FII inflow may sustain in the coming months.
"Given the expected rebound in the economy in Q2FY22, we expect FII/FPI inflows to sustain in the coming months. However, the sharp rise in inflation in the US is a cause for concern in the medium term. We do not expect the FPI flows to be impacted in the near term as markets are viewing the recent sharp rise in US Inflation as transitory in nature," said Roy.
Abundant liquidity and low rate regime have boosted inflows in the emerging markets, including India. However, as the US Fed has indicated that it may go for at least two rate hikes by the end of 2023, the Indian debt market may see some outflows.
"Any change in monetary policy stance by the Federal Reserve can hurt emerging economies including India. Fed has hinted at a rate hike of 50 bps by 2023. If the inflation rate continues to stay in the uncomfortable range, Fed will be forced to act even before 2023," said Deepthi Mathew, Economist at Geojit Financial Services.
"In such a scenario, one could witness the reverse flow of funds from the emerging markets. FIIs/FPIs would prefer investing in the US as the emerging markets won't look lucrative in terms of returns. Indian economy passed through a similar episode in 2013, the infamous 'Taper Tantrum' Emerging markets found it difficult to digest the news of interest rate hikes by the US Fed," said Mathew.
A high level of inflation in the US for a prolonged period of time is a key risk, Roy pointed out, as it may force the US Fed to slow down its asset purchase earlier than expected thus leading to a reversal in FPI flows later during the year.
"While sectors with secular growth stories like IT, pharma and chemicals will continue to attract FPI flows in the coming months, cyclical sectors like auto, consumer durables, cement and metals will also attract FPI flows in the coming months," Roy said.
Sectors like multiplexes and hotels should also do well as they would be the biggest beneficiaries due to the reopening of the economy.
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