At a time when uncertainty looms large on equity market - global as well as domestic front - due to the COVID-19 pandemic, data on FPI equity inflows gives hope.
As per a report by ICICI Securities, FPI equity inflows in August 2020 so far stand at nearly $6 billion, which is close to the highest monthly number in history.
"The inflow is significantly higher than other EM markets and will boost sentiments towards India," said the brokerage.
At first glance, it appears that the excess liquidity in global markets found its way to emerging markets like India.
ICICI pointed out that given the likely current account surplus situation in 2020, the RBI has been buying excess dollar inflows to avoid sharp movements in the rupee, resulting in forex reserves hitting $535 billion. This has resulted in improving rupee liquidity, which continues to be at a significant surplus of Rs 6.5 trillion.
This may underpin the bullish sentiment in the market and may push markets into bubble territory and increase momentum in broader markets, ICICI Securities said.
On the front of FDI, inflows to India were flattish in FY18 & FY19 at $45 billion. This trend has improved in FY20 to $50 billion in spite of COVID.
Vinod Nair, Head of Research at Geojit Financial Services expects this trend to improve much better in future due to attractive corporate tax (amongst the lowest in the world), incentive to set up best manufacturing capacity in India to meet domestic and export demand (example, PLI scheme) and eagerness of countries and corporates to diversify away from China to other resourceful emerging countries like India.
While a significant chunk of FPI inflow can be attributed to the deals in select stocks such as Reliance Industries, the emergence of a risk-on strategy in the global equity markets also contributed to it.
"Data shows that inflation crept up in July globally. When inflation rises, global fund managers shift money to cyclical or risk-on assets. So, money moves from developed markets to emerging markets. That is benefitting the flow into India," said Sameer Kalra, Founder, Target Investing.
"It is expected that inflation will continue to see an uptick for the next 6-7 months because the money supply is going up. Global active money is shifting so the FPI trend should continue for India," he added.
Nair of Geojit Financial Services pointed out that this surge in FII investment started with RIL announcing big investments by key global technology players and institutional investors. Post the first deal in March, they continued to announce more deals and investments.
"More importantly, a risk-on strategy emerged in the global equity markets triggered by the highest ever-Quantitative Easing by the US Fed and record fiscal stimulus by the US government. A part of this liquidity went to emerging markets, like India," Nair said.
"Along with the risk-on global equity markets, the measures announced by the government and monetary stimulus by the RBI instilled confidence. Good handling of the crisis and staggered re-opening of the economy brought confidence to foreign, domestic and retail investors," Nair added.
There are apprehensions that the economic reality will soon derail the rally in the market.
The current ground reality is that the Indian economy will witness negative GDP growth in FY21, the COVID-19 cases are still on the rise in practically all parts of the country, massive business disruptions have taken place and several companies are going to see their earnings growth getting shaved off over an immediate couple of quarters.
However, experts point out that with the strong undercurrent of global liquidity, unlocking picking up and the strides made in the development of a COVID vaccine, a major correction is unlikely.
"If markets were to correct from the current level, it will be restricted to 10-15 percent," said Unmesh Kulkarni, Managing Director Senior Advisor at Julius Baer India.
Kalra of Target Investing said that the talks of significant market correction have been rife for the last 2-3 months but it did not happen and there is no certainty if it will happen in the next 2-3 months.
"Everybody says the market will have a reality check. But at what point it will be, no one knows. People have been waiting for it for the last 3 months. I don't think it will happen in the next 3 months also. Even the September quarter earnings will be better than what people estimate. So these bounce in the market will not go," said Kalra.
However, Nair of Geojit Financial Services is of the view that it is fair to expect some consolidation in stock prices since fundamentals do not support the present valuation of the market.
"Moreover, uncertainties regarding the impact of the pandemic on the global economy and prospects of a strong revival continue to be areas of concern to investors," Nair said.
Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.