Ahead of the Union Budget and India’s inclusion in JP Morgan’s bond index, foreign institutional investors (FIIs) turned net buyers in June, scooping up Indian stocks worth about Rs 26,565 crore in the month.
The buying comes as investors brushed aside election-related concerns. Improved GDP forecasts and robust earnings from Indian corporations have also bolstered FIIs' interest, said analysts.
Political stability despite the BJP not getting a majority on its own, and the sharp rebound in markets aided by steady DII buying and aggressive retail buying, has forced the FPIs to turn buyers in India, noted V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
"It appears that FPIs have realised that selling in the most performing market would be a wrong strategy," he said.
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The government's continuity following the election results guarantees ongoing reforms. This has led to an improved GDP growth forecast, attracting Foreign Portfolio Investment (FPI) buying.
However, the FPI buying has been focused on a few specific stocks rather than being widespread across the market or sectors, according to Vipul Bhowar, Director, Listed Investments, Waterfield Advisors.
"This is because Indian equities are still considered overvalued by FPIs. FPIs are favouring the financial, auto, capital goods, real estate, and select consumer sectors.
Even though analysts believe that markets could turn volatile once again as higher valuations and no change in interest rate stance could prompt investors to book profit at regular intervals, it is expected that FPIs will make selective investments in specific sectors and stocks instead of broad-based buying across the market.
FPI buying can be sustained in the near term provided there is no sharp upmove in the US bond yields, said Vijayakumar. India’s inclusion in the JP Morgan Bond Index is certainly positive. The debt inflows for 2024 so far stand at Rs 68,674 crore.
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"In the long term, this will reduce the cost of borrowing for the government and reduce the cost of capital for corporates. This is positive for the economy and therefore for the equity market," he added.
The primary goal of including the bond index is to attract foreign investment into the Indian debt market rather than the equity market.
"As foreign investors become more familiar with the Indian fixed-income market, they may start to explore other investment opportunities, thereby opening up new avenues for growth and diversification, which should be a source of optimism for the future of FPI in India," Bhowar said.
The analyst believes that after the election outcome, FIIs' attention will gradually shift towards the budget and Q1FY25 earnings, which could determine the sustainability of FPI flows.
"While India would continue to be a preferred market for FPI flows, the actual inflows may not be the highest among emerging markets due to intermittent volatility and shifting global investor sentiments, he said.
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In the year so far, FIIs have net bought shares worth Rs 129,046 crore, while DIIs have bought shares worth Rs 236,325 crore at the same time. The long-term outlook remains positive, providing reassurance about the stability of FPI flows in India, Bhowar added.
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