FIIs buy $931 million worth of stocks over 6 days; sign of renewed interest in India?

Foreign institutional investors, who were net sellers of Indian shares since the start of 2023 amid expectations of continuing rate hikes by global central banks due to inflation, bought a net $931 million of Indian stocks over six sessions.

FIIs bought $931.13 million in equities during February 9-16, data from the National Securities Depository Ltd showed. Since the start of the year, FII sold $3.34 billion in local equities, while in 2022, they remained net sellers of $17.21 billion.

The purchases took place even amid the probability of higher inflation in India and globally and the central bank's disinclination to reduce the pace of interest rate hikes. Economists raised expectations of the Reserve Bank of India increasing rates after higher-than-anticipated consumer inflation in the country.

Moreover, US producer prices rebounded more than expected in January, highlighting persistent inflationary pressures that may prompt the Federal Reserve to implement additional interest rate hikes.

Experts noted that India's macroeconomic indicators remain robust compared to other markets. The country's GDP is projected to grow 7 percent in FY23, the highest in emerging markets.

Strengthening position

The recent budget announcements of double-digit growth in capex, higher GDP growth expectations for FY24 and a commitment to fiscal discipline indicate a strengthening of the country's financial position.

“Foreign investors always like higher economic growth over valuation. Therefore, investors are willing to give a premium to Indian markets,” said Mitul Shah, head of research at Reliance Securities. “India is better placed compared to most other nations in terms of higher growth supported by strong macros, government’s initiatives, coupled with the China-plus-one strategy to play in the next decade. We expect FII inflows to continue and equities would continue their outperformance with double-digit returns.”

The MSCI Emerging Market equities index has surged by over 30 percent in 2023, signalling the return of a bullish market. This trend encouraged investors to revisit the prospects of developing economies catching up with industrialised nations, especially since the International Monetary Fund (IMF) recently revised its global economic outlook upward, analysts said.

The recent decline in commodity prices and indications of inflation cooling have generated market optimism worldwide. Stock funds in Europe, China and other emerging markets witnessed an influx of capital, driven by lower gas prices, a weaker dollar, and positive sentiment on China's economic reopening.

As China benefits from this change in investor sentiment, India is also experiencing a commensurate surge of foreign investment flows, analysts said.

“We may see the dollar losing momentum as the Federal Reserve's rate-hiking cycle matures and as relative economic growth outside of the US improves,” said Deepak Jasani, head of retail research at HDFC Securities.

“As the dollar potentially weakens, EM countries could benefit from the relative appreciation of their own currencies. While US-China relations remain complicated, the reorganisation of strategic supply chains could create new opportunities for EM nations other than China.”

Developing-market bond and equity funds saw a historic inflow of $12.7 billion during the week ended January 18, while US equities experienced an outflow of $5.8 billion. This represents a significant shift in investor sentiment as more capital is directed towards the developing markets, while investors are pulling back from US equities, according to HDFC Securities.

Analysts said if the global risk appetite continues to be robust, emerging markets may continue to experience inflows. Nevertheless, any significant change in interest rates by major economies could undermine this positive sentiment.