Sensex crosses 65,000: the FPI factor behind the markets surge

Why have markets surged to fresh peaks?

The major driver is the return of FPIs, the buoyancy in the global markets, strong macroeconomic fundamentals and the easing of inflation in India. “The global support to the bullishness is coming from the US, where the market is resilient supported by better-than-expected Q1 GDP growth of 2 per cent and declining weekly jobless claims,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

This resilience of the US economy, which was not anticipated and discounted by the market, is the strongest pillar of support for the global markets now, he said.

The mood in the frontline market is very optimistic looking at the aggressive FPI inflows and settling down of global macro headwinds followed by better than strong domestic micro economic data.

The 5-big positive domestic catalysts driving the current upsurge are India’s strong GST collection that crossed Rs 1.60 lakh crore mark in June, better recovery in the monsoon in June and normal rains expected in July as well, expected stable interest rate scenario worldwide, the US Q1 GDP reassessment from 1.3% to 2%, and easing of US PCE inflation that offers relief to investors who were worried about further interest rate hikes.

Global markets are supported by resilient economic data, avoiding the possibility of a recession. India’s stock market trend was broad-based, owing to the outperformance from energy, financial, metal, and FMCG sectors. Economic activities are gaining strength with the manufacturing PMI level at 57.8, indicating sustained demand for products, fostering a sense of confidence in the manufacturing prospects.

FPIs back with a bang

In the April-June quarter, FPIs pumped in Rs 1.02 lakh crore ($12.5 billion) into equities. As much as Rs 14,803 crore ($1.80 billion) FPI inflows into equities came on June 30 when the Sensex and Nifty closed at all-time-peaks. They remained consistent buyers, with average daily inflows of around Rs 1,100 crore in the first quarter, according to National Securities Depository Ltd (NSDL) data.

In June, foreign capital flows into equities were Rs 47,148 crore, the highest since August 2022 when inflows stood at Rs 51,204 crore.

FPIs have been bullish on Indian equities on the expectation that the Reserve Bank of India (RBI) has come to the end of its rate hike cycle. Retail inflation eased to 4.25 per cent in May. “India is the best-performing economy compared to the other economies. The corporate sector also showed a turnaround in the fourth quarter. These are the factors because of which we have seen more FPI interest in India,” said Madan Sabnavis, Chief Economist, Bank of Baroda (BoB) said.

Higher fund flows also resulted in a stable rupee during the quarter. The domestic currency moved in a narrow range of 81.68 to 82.90 against the dollar in the April-June period.

Domestic institutions sitting on a cash pile:

Unlike FPIs, domestic institutions (DIIs) led by LIC, insurance companies and mutual funds are not very active in the ongoing bull run. DIIs who were big buyers when the market was down in the second quarter and last quarter of FY2022-23 are now sellers on many days. On July 3, when FPIs bought stocks worth Rs 1,995 crore, DIIs sold Rs 337 crore worth of stocks. In the last quarter (January-March) of FY 2023, DIIs had bought stocks worth Rs 83,000 crore while FPIs sold stocks worth over Rs 50,000 crore.

“Domestic institutions are contrarians. They buy when other big operators like FPIs sell… and sell when FPIs and others buy. They have made good profits through this strategy,” said a fund manager.

Retail investors should be cautious:

Analysts have cautioned that there is no room for exuberance or going overboard with the ongoing market rally. Globally growth is low and there is a possibility of the US economy slowing down in H2 of CY 2023. This can impact India’s exports and thereby India’s growth, too.

“The ongoing rally in the market has made valuations very rich. Nifty is trading at above 20 times estimated FY 24 earnings. This is higher than the historical average. Momentum can take the market higher, but at high valuations risk is high. Some presently unknown negative developments can trigger a sharp correction. So, even while remaining invested in the market, investors have to be cautious,” Vijayakumar said.

Retail investors have a tendency to enter the market and make aggressive purchases when prices have peaked and valuations are already stretched. “We have seen retail investors losing money in the stock market bubbles in the past. They usually buy when the prices are high and left holding the babies in the subsequent correction and falls,” said an analyst with a brokerage.

What is the outlook on markets?

In July, the market trend will be influenced by auto sales numbers in June, first quarter results, progress of the monsoon and the Fed rate decision and commentary by the month end. The retail inflation for the month of June will also be an indicator about the future course of action by the RBI. As a fund manager put it, the market always fears the unknown which is lurking in the shadows.

“Nifty finally has created history by crossing the 19000-landmark, making the all-time high level with bias and sentiment maintained strong. Now with near-term support of 18800 zone, one can anticipate for next targets of 19200-19250 levels with most of the frontline heavyweight stocks getting into momentum improving their bias,” said Vaishali Parekh, Vice President – Technical Research, Prabhudas Lilladher Pvt. Ltd.

If FPI inflows continue at this level, the key indices will witness scale peaks in the coming days. That said, the market is likely to witness occasional correction as prices of heavyweights have already shot up.