If the threat of Covid-19 pandemic in March forced foreign portfolio investors (FPIs) to look for safety of investors’ capital by selling domestic equities worth a net of Rs 61,973 crore during the month, the announcement of vaccines by four manufacturers in November has led to a near reversal of that outflow. FPIs invested a net of Rs 60,358 crore in domestic equities.
The record monthly inflow of FPI money into domestic equities in November has also meant that in just eight months of the current financial year, FPI inflow aggregated to Rs 1,56,275 crore — the highest in any financial year.
The jump in FPI inflow in November has led to a significant jump in stock markets, as the benchmark Sensex at the BSE rose 4,535 points, or 11.4 per cent. Between April 1, 2020 and November 30, 2020, the Sensex has risen by 49.8 per cent. Even the mid- and small-cap indices have risen sharply by 60 per cent and 75 per cent, respectively.
While the outflow of funds slowed significantly in April and domestic equities started witnessing their returns beginning May, in line with the relaxations in stringent lockdown norms that were imposed in the last week of March, better-than-expected recovery of the economy over the last couple of months has revived investor confidence.
Over the last couple of months, there has been progression on the recovery front. If, in September, several key consumption-oriented economic indicators such as electricity demand, freight traffic, toll collections and petrol demand surpassed their pre-Covid levels of February 2020, in October there was further improvement with positive data flow on GST collections, automobile sales, diesel demand and PMI manufacturing, among others.
While these came as reassurance for FPIs to take a call on Indian equities, a better-than-expected GDP data for the second quarter ended September 30, 2020 has come as another booster.
In the second quarter, India reported a GDP contraction of 7.5 per cent, a sharp recovery from the contraction of 23.9 per cent in the first quarter of FY21. The better-than-expected data and negligible chances of another nationwide lockdown have raised hopes of market participants and economists as they are looking forward to further recovery in the third and fourth quarters, and a positive growth of over 10 per cent in fiscal year 2021-22 on the back of low base year growth.
In a report released on Friday, Barclays India said while the economy has shrunk for two consecutive quarters, the economy will return to positive growth and grow by 0.4 per cent in the third quarter. Even as there are several positive developments, some concerns still remain. Many are concerned over the fact that India may take a long time in vaccinating its entire population and, thus, it needs to be vigilant about subsequent waves of Covid-19.
Another major issue that needs to be addressed is unemployment across the country and recovery of several key sectors such as tourism, airlines and hospitality, among others. There is also concern on the limited headroom available for the government to spurt spending as the Centre’s fiscal deficit in the seven months to end-October came at Rs 9.53 lakh crore (126.7 per cent of the Budgeted target for the fiscal year).
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