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India has remained one of the attractive destinations for foreign portfolio investors (FPIs) with total inflows at Rs 61,958 crore so far in the current fiscal. However, post Adani-Hindenburg episode, market regulator Sebi’s proposal to ask FPIs to disclose the ultimate beneficiaries of high-risk FPI funds is likely to impact the inflows, analysts said.
India’s strong macroeconomic fundamentals and rising risk appetite are the reasons for the rise in FPI investment in the country’s market. FPI invested Rs 11,631 crore in April, Rs 43,838 crore in May and Rs 6,489 crore in the first two days of June into the domestic equity market, according to National Securities Depository Ltd (NSDL) data.
Last week, Sebi floated a consultation paper proposing tighter disclosure norms for high-risk FPIs. Some experts feel that these recommendations could have an impact on FPI inflows. “The Sebi plan is to tighten disclosure standards for foreign portfolio investors (FPI) that own more than 50 per cent or more of their equity assets under management (AUM) in a single corporate entity. Sebi might be suspecting involvement of some high-risk FPIs in Indian companies,” said an official of a broking firm.
Assets of Rs 2.6 lakh crore, or 6 per cent of total FPI equity AUM, and less than 1 per cent of Indian equity market capitalisation may potentially be identified as high-risk FPIs that meet either of the 50 per cent group concentration or the Rs 25,000 crore fund size thresholds, Sebi says.
In the first three months of FY23, FPIs had massively sold Indian stocks amid risk aversion due to the Ukraine-Russia war. Between April and June 2022, they pulled out Rs 1.07 lakh crore from the equity market. During FY2023, FPI outflows from the equity segment stood at Rs 37,632 crore. “A survey among foreign portfolio investors showed that India is now the consensus overweight among all emerging markets. In May, India attracted the largest investment among all emerging markets, and FPIs were sellers in China,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
He expects FPIs to likely continue their investments in India in June too, since the latest GDP data and high-frequency indicators reflect a robust economy gaining further strength. “FPI buying in Indian equities may continue given weaker growth elsewhere and the good earnings season so far,” Credit Suisse said in its India Monthly Outlook for May 2023.
The country’s gross domestic product (GDP) expanded at 6.1 per cent January-March 2023 quarter, which, in turn, lifted the growth estimate for the full year 2022-23 to 7.2 per cent.
Moreover, data showed that the country’s manufacturing sector recorded the strongest growth in 31 months in May, led by robust demand for domestic products. The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) rose to 58.7 in May from 57.2 in April, indicating the strongest improvement in the health of the sector since October 2020.
The Reserve Bank of India also sees the rise in FPI flows as an opportunity to buy dollars and increase foreign exchange reserves. “Towards the end of May, we saw the RBI’s intervention in the forex market. They were buying dollars from the market,” said a forex market participant.
The recent RBI data, which comes at a lag, showed that the country’s forex reserves stood at $589.138 billion in the week ended May 26, 2023. The forex reserve data for the week ending June 2 will be released on June 9 by the RBI. When the RBI purchases dollars, it gives the rupee in return, which helps in improving the banking system liquidity.
On a net basis, the banking system liquidity improved to Rs 2.4 lakh crore on June 1 from Rs 49,635 crore on May 24, RBI data showed. The RBI’s dollar buying following a rise in FPI inflows is just one of the reasons for the improvement in banking system liquidity.
