Mumbai | June 7, 2021 3:00:41 am
After withdrawing funds from India in April and May, foreign portfolio investors (FPIs) have changed their strategy in the domestic markets in June. FPIs invested Rs 7,967 crore in equities in the first four trading sessions of June as the markets remained in the grip of bulls in the wake of falling new Covid cases and possibility of lifting of lockdowns in many states in coming days.
However, analysts warn that FPIs are likely to pull out money again when the United States and other major economies reverse their “ultra-loose” monetary policies, which may trigger a selling spree in emerging markets like India. The June inflow follows a net withdrawal of Rs 2,954 crore in May and Rs 9,659 crore in April from the stock market, as per National Securities Depository Limited data.
While the Sensex had gained nearly 1,300 points in the last week of May despite FPI selling, the index remained above 52,000 and closed at 52,100.05 during the week ended June 4.
According to VK Vijayakumar, chief investment strategist, Geojit Financial Services, there has been a sudden turnaround in FPI strategy during the last two weeks. Starting early April till mid-May, FPIs were consistent sellers in India. Perhaps the second wave of Covid, the consequent widespread restrictions on economic activity and its potential impact on growth and corporate earnings unnerved them.” They moved money to other emerging markets. But the sheer momentum in the Indian markets has forced FPIs to change their strategy. They have turned into strong buyers, now having bought equity worth Rs 7,967 crore in four days.
Falling cases help
foreign portfolio investors put in Rs 7,967 crore in equities in the first four trading sessions of June, as the markets remained in the grip of bulls in the wake of declining new Covid cases and possibility of lifting of lockdowns in many states in the coming days. However, FPIs may pull out money again when the US and other major economies reverse their “ultra-loose” monetary policies, which may trigger a selling spree in emerging markets like India.
Globally, stock markets are unusually stable and resilient. This trend is likely to change when there are indications of change in the ultra-loose monetary policy of the US Fed. When the GDP growth and job generation in the US become strong or inflation rises more than expected, the Fed will start talking of tapering their bond buying programme. “This is likely to trigger selling in stock markets globally. This will trigger capital outflows from emerging markets too,” Vijayakumar said.
There was surplus liquidity as all central banks were in the zero interest rate mode and there was quantitative easing across the continents in various forms.
The upsurge in liquidity and depressed interest rates, which get reflected in the Treasury yields and LIBOR, moved funds to emerging markets.
“India definitely looked much better, given the spread of the virus though the Q1 GDP growth rate, which was negative, was the most unsatisfactory number. But, clearly, investors saw opportunity in the future and came in. But, this held for almost all EMEs, which led to stock indices doing well across the world,” Care Ratings said in a report.
In June, FPI buying was selective across categories like technology, private insurers, agrochemicals and fintech. “Smart FPI investors have bought into broader market themes in India, outside the index, which, coupled with buying from savvy domestic investors, have reduced the valuation differential between large caps and mid caps across sectors,” said S Ranganathan, head of research at LKP Securities.
There’s a general perception that FPIs drive the stock market and, hence, they are vital to the system.
While this was a very strong view in the nineties, the emergence of mutual funds as major investors in the market has changed the dynamics. “There have been times when the FPIs have been dormant, but mutual funds have been buying based on retail demand which had an impact on stock markets,” Care Ratings said.
FPIs have invested Rs 51,096 crore in domestic equities during the January-June period of 2021.
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