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FPIs unfazed by high valuations, Covid woes; invest Rs 60,000 cr in six months

The month of June witnessed FPI inflows of Rs 17,215 crore, taking the total FPI investment in equity for calendar year 2021 to Rs 60,342 crore. However, the debt market reported FPI outflows of Rs 22,000 crore.

Written by George Mathew
Mumbai | July 4, 2021 12:51:49 am
Foreign investors made net investments of over Rs 1.20 lakh crore in November and December 2020 and the biggest monthly inflow in 2021 so far was Rs 25,787 crore in February.

Despite high valuations and the sharp rise in Covid-19 cases, foreign portfolio investors (FPIs) have remained bullish on Indian markets in the first six months of the calendar year amid expectations of a recovery in the economy.

The month of June witnessed FPI inflows of Rs 17,215 crore, taking the total FPI investment in equity for calendar year 2021 to Rs 60,342 crore. However, the debt market reported FPI outflows of Rs 22,000 crore. Foreign investors made net investments of over Rs 1.20 lakh crore in November and December 2020 and the biggest monthly inflow in 2021 so far was Rs 25,787 crore in February.

The Sensex has risen 9.9 per cent, or 4,723 points, to 52,484.67 in the last six months.

S Ranganathan, head of research at LKP Securities, said, “As the profit to GDP ratio hit a 7-year high, FPIs continued to repose faith in Indian equities with positive flows of over Rs 120 billion during the month of June 2021. The month of June witnessed a gradual opening up of the localised lockdown seen in April and May and FPIs bought stocks across sectors like IT, fintech and insurance which again was pretty much broad-based across large-caps and mid-caps.”

In line with the trend of sell-off in the debt market, FPIs sold debt worth Rs 4,828 crore last month, taking the total debt selling to Rs 22,151 crore in CY21. The second half of June witnessed continuous selling in equities by FPIs. In the 10 trading sessions between June 17 and 30, FPIs sold continuously in eight sessions.

“The selling in cash markets is actually very high since there are many block deals (predominantly buying) happening outside the cash market. Strengthening of the dollar (dollar index at 92.45) and high valuations are major factors forcing FPIs to sell more in emerging markets like India,” said VK Vijayakumar, chief investment strategist, Geojit Financial Services.

FPIs may continue to book profits in India, going forward, especially if growth falters and the recovery takes a hit. However, they are unlikely to sell aggressively in spite of higher valuations as India Inc is all set to report excellent numbers in FY22, he added.

“In the medium term, we expect FPI flows to India to remain strong, driven by recovery in growth. Positive export outlook led by a revival in the global economy coupled with low interest rates in the domestic market is expected to augur well for India,” said Shrikant Chouhan, executive vice president, Kotak Securities.

Besides the vaccination drive and a decline in Covid cases, expectations of increased consumer spending and normal monsoon rainfall are likely to drive the domestic demand. “Also, we expect the upcoming festive season to also boost the domestic demand,” Chouhan added.

Analysts don’t expect a big rise in FPI flows in 2021. “We remain cautious on the FPI flows which will probably be in the range of $20 billion as they keep switching their portfolios across countries,” said a Care Ratings report.

However, FPI outflows may happen if the dollar value appreciates. “If the dollar appreciates sharply, there is a risk of foreign portfolio investors pulling out of India, but in our view, given India’s improving fundamentals, FPI outflows would be limited and much lower than during the taper tantrum in 2001,” said a Credit Suisse Wealth Management report. “If India manages to vaccinate its population faster, the higher-than-average valuation premium for India may sustain given the marked improvement in corporate leverage and return ratios.”

On the flip side, inflation level in the USA as well as in India surprised on the upside. “The Federal Reserve (Fed) officials have started discussing tapering their asset purchase programme (in our view during mid-next-year) and rate hike expectations have been brought forward to 2023,” Credit Suisse said.

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