India received a record Rs 2 lakh crore as foreign portfolio investment (FPI) in 2017 with most of the money — nearly three-fourths of the total inflows — flowing into debt despite the recent rate hikes by the US Federal Reserve.
The markets were awash with liquidity in calendar year 2017 following demonetisation and bank deposits fetching lower interest rates. Taking into account the investments made by insurance companies, mutual funds (MFs) and FPIs, the total institutional investment in the stock market could easily top Rs 2,20,000 crore mark, the largest investment in the history of the capital market in recent times.
Of the Rs 2,00,048 crore invested by FPIs in 2017 as against an outflow of over Rs 23,000 crore in 2016, equity markets got Rs 51,252 crore and the balance went to the debt market as foreign investors took advantage of the interest rate differential in India and their home nations. However, domestic MFs were dominant players, investing in almost the double amount of over Rs 1.2 lakh crore in 2017 as investors lined up to open SIPs (systematic investment plans) of MFs.
Life Insurance Corporation (LIC), the country’s largest financial entity with assets of Rs 27.25 lakh crore, invested Rs 44,000 crore in the market as on November 30, 2017, and it is likely that investments might touch Rs 50,000 crore by the end of the financial year, chairman V K Sharma had said. It made a profit of Rs 12,374 crore from the stock market in the first six months of FY18 as compared with Rs 10,643 crore in the corresponding period of FY17, showing a 16.3 per cent growth.
Aided by the huge institutional investment, the Sensex gained 7,430 points, or 27.90 per cent, in 2017 and investors making huge notional profits of Rs 45.50 lakh crore, as the market capitalisation surged in a year marked by the impact of demonetisation and the implementation of the goods and services tax (GST). “The situation is such that we are finding it tough to manage the inflows into mutual fund schemes through SIPs. Valuations are already high. Many funds are now putting curbs on inflows,” said a fund manager.
FPIs have traditionally been considered to be one of the driving forces of the stock market. However, the preference for investment in debt of emerging market economies (EMEs) has become progressively attractive in the past five years or so. “As most of the western central banks have been going in for quantitative easing and maintained low interest rates to spur their economies following the financial crisis, it was natural for these funds to move to the EMEs,” said a report by Care Ratings.
The Reserve Bank of India (RBI) widened the scope of their participation in the government debt market by linking their limits to outstanding debt of both the central and state governments. “This gives automatic buoyancy to investment levels. It has also been noticed that the FIIs have been progressively utilising their debt limits in corporate paper, which is a positive sign. As of latest in December 2017, overall utilisation of limit is 89 per cent with the ratios being 84 per cent for government securities and 95 per cent for corporate bonds. Within government securities, utilisation was 99 per cent for central government paper and 16 per cent for SDLs,” it said.
Analysts said FPI flows would need to be observed and monitored carefully in 2018 as even other central banks will be raising their benchmark rates. As inflation is moving in the upward direction, there could be a prolonged gap before any rate cut is invoked by the RBI which will keep Indian markets still attractive. In fact, if inflation crosses five per cent, there could be a rate increase.
However, experts have cautioned that the year 2018 might not be that smooth for the stock markets and forecast a bumpy ride for investors in the wake of rising inflation, fiscal deficit and the general elections in 2019.
“From a retail participation point of view, with the decline in interest rates both in terms of savings rate of interest as well as the fixed deposit rate of interest, investors have little choice but to reallocate their wealth to other asset classes such as equity to improve their returns over the long term,” said Jimmy Patel, managing director and chief executive officer, Quantum AMC. That is also one of the reasons why the MF sector is looking forward to get a nod from the government for pension funds.