FIIs remain buyers for 5th consecutive month in February; will the trend sustain?

While signs of economic recovery and better-than-expected corporate earnings attracted foreign funds, the Union Budget 2021 seems to have boosted FII inflow as February's inflow into equities was the fourth-highest since January 2020. In net terms, FII inflow was the fifth-highest since January 2020.

The Budget 2021 turned out to be growth-oriented as infra-related announcements and government CAPEX took the centre stage while the government stayed away from levying any fresh tax or increasing the existing ones.

Ajit Mishra, VP Research, Religare Broking pointed out that the FII flow has been strong in the Indian markets since November 2020 on the back of economic recovery, demand pickup pace which led corporates to post better earnings and lastly anticipation of strong growth in 2021-22 for emerging countries like India. The single-day FII figure of 28,000 crore on February 24 included the deal in Bosch worth nearly Rs 30,000 crore.

While softer rate-regime is positive for Indian equities, rising bond yields is a looming risk that could puncture FII inflow.

The foreign fund inflow can take a hit, especially the debt segment, owing to a sustained rise in the US bond yields.

Analysts also point out the shrinking differential between the US and Indian 10-year bond yields which could result in more FII outflows.

"If the yields continue to rise, there could be some moderation in foreign flows to emerging markets like India. However, the comforting factor is that the US Fed has continued to maintain its accommodative stance, which could provide some relief to foreign investors," said Mishra.

What should investors do?

There may be some moderation in foreign capital inflow if the US bond yields top 2 percent.

"The momentum is likely to continue at a slower pace. The rise in bond yields in the US will constrain capital flows a bit. If it goes beyond 2 percent, there is a risk of capital outflows from emerging markets like India. This can negatively impact markets," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

The Indian market has witnessed correction in the last two weeks and indications are in the favour of further decline. However, the long-term trends of the market remain positive and investors should pick quality stocks on dips to get decent returns, say experts.

"The medium to long-term remains positive for Indian markets, given the recovery in macro numbers, government support, increasing demand and anticipation of better corporate earnings. Investors should utilise this phase to accumulate quality stocks on dips," Mishra said.

Low-interest rates and government stimulus will continue to underpin the market.

Major central banks of the world, including the US Fed and RBI, have said that the rates may remain low for a longer period to ensure sustainable growth. These factors will continue to play in favour of the Indian market.

"We are not extremely bearish on the market as the massive stimulus which is likely to continue in this calendar year and economic recovery put together should provide support to market at lower levels," said Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities.

"For India, most of the factors driving markets are in place except for valuations. As time goes by, India’s valuations will moderate making it a good buy on the dips market going forward. The Nifty50 range of 13,000 to 14,500 is an ideal range to accumulate stocks from 2 to 3 years perspective," Oza said.

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