After four months of selling frenzy, overseas investors turned net buyers in February and pumped in a staggering Rs 15,862 crore into the Indian capital markets, enthused by clarity on foreign portfolio investment (FPI) taxation.
Going ahead, the outcome of the US Federal Reserve meeting on March 15-16, and sustainability of recovery in Indian corporate earnings will be key factors in deciding the course of Foreign Portfolio Investors' (FPIs) flows in Indian debt and equity markets.
According to depository data, foreign portfolio investors (FPIs) infused a net sum of Rs 9902 crore in equities last month and another Rs 5,960 crore in the debt segment, translating into a total inflow of Rs 15,862 crore.
The latest inflow followed a net pullout of Rs 80,310 crore from equity and debt together in the past four months (October-January). Prior to that, FPIs had invested over Rs 20,000 crore in the capital market in September 2016.
"The surge in FPI flows can be attributed to global as well as domestic factors. Globally, it seems that the bout of risk aversion that started with US Presidential election results is subsiding. The rise in oil prices and other commodities also hint at rising global trade and growth led by USA," Bajaj Capital Senior VP and Head Investment Analytics Alok Agarwala said.
"However, global concerns still loom large as chances of a rate hike by US Fed in their mid-March 2017 meet have risen.
Bank of England has also hinted at a sharper than expected rise in interest rates in UK in the near future," he added.
On the domestic front, key developments that led to rise in FPI interest in Indian equity and debt markets were lower than expected dent in economic growth post demonetisation, as reflected by better than expected corporate earning numbers in third quarter of the current fiscal. Besides, hawkish RBI policy has provided support to Indian rupee.
"After being net sellers in January 2017, FPIs pumped in funds post-Budget, especially after they received clarity on capital gains taxation as well as tax on indirect transfers," Vidya Bala Head Mutual Fund Research at Fundsindia.com said.
"Also, the demonetisation fears did not reflect much in the earnings numbers which could also be one more reason for FPIs to repose faith in the Indian markets. A lesser than painful demonetisation impact and the confidence arising from digitisation and resulting transparency could see FPIs viewing Indian markets more seriously," she added.
Finance Minister Arun Jaitley, in his Budget speech, proposed that category I and II FPIs should be exempted from taxation on indirect transfers.
"No change in long-term capital gains tax on equities has lightened investors' fears on transaction cost," said Vinod Nair, Head of Research, Geojit BNP Paribas Financial Services.
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