The value of foreign portfolio investors' holdings in the domestic equities reached USD 626 billion in the three months ended June 2023, which was 20 per cent higher from the year-ago period, according to a Morningstar report. This could be attributed to good performance in the domestic equity markets as well as strong net inflows from foreign portfolio investors (FPIs).
According to the report, the value of FPIs' investments in Indian equities rose from USD 523 billion as of June 2022 to USD 626 billion at the end of June 2023. On a quarter-on-quarter basis, the value of such investment rose 15 per cent from USD 542 billion recorded in the three months ended March this year.
This has helped in pushing FPIs' contribution to Indian equity market capitalisation marginally to 17.33 per cent for the quarter under review from 17.27 per cent for the March quarter. After pulling out funds to the tune of USD 3.2 billion from the Indian equities in the March quarter, FPIs took a sharp U-turn in the three months ended June and made a strong comeback with a net investment of USD 12.5 billion.
"The flows were largely driven by the prospects of interest-rate direction in the US, how the global inflation numbers were shaping up, and China's economic woes, along with domestic indicators. The sentiments broadly remained positive throughout the quarter," the report noted. It was a positive start of the quarter with apprehensions about the banking crisis in the US and Europe fading.
Also, there were expectations building that the US Federal Reserve will most likely slow its pace of rate hikes in future, which augured well for foreign money to flow into the Indian equity markets. It was a positive start of the quarter with apprehensions about the banking crisis in the US and Europe fading.
Additionally, Indian markets also witnessed some consolidation towards the end of the previous quarter, leading to some rationalisation in its valuations. Besides, the resilience of the domestic economy amid uncertain times also prompted FPIs to turn their focus back on Indian stocks. FPIs were net buyers in April, May, and June. Since then, there has been no stopping by FPIs as they continued to invest substantially into the Indian equity markets in July, as well as so far in August. FPIs were net buyers in April, May, and June.
However, there were a few challenges, which did reduce the pace of flows. They adopted a cautious approach on the back of global credit ratings agency Fitch downgrading the credit rating for the US to AA+ from AAA, thus denting sentiments. Also, to combat inflation that is beyond the target, the US Federal raised its benchmark lending rate in its July meeting by 25 basis points, its highest level since 2001. It also signalled the possibility of more hikes going ahead and ruled out the likelihood of rate cuts any time soon.
"That said, there continues to be uncertainty in the global economy, and the underlying scenario is fast changing. This could make flows from FPIs volatile," the report noted.
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