Have FIIs Realised Their Mistake Of Exiting Indian Market In A Frenzy? 

After pumping an investment of Rs 16,175 crore into equities so far this month, foreign institutional investors (FIIs) seem to be back with renewed interest in the Indian market post a nine-month lull. In contrast, they had bought shares worth Rs 4,989 crore in the entire month of July, showed data from National Securities Depository Limited. 

From the beginning of this year till June, FIIs had sold shares worth over Rs 2 lakh crore following a global rise in inflation that led to a spike in interest rates across the world, even in the US. That, in turn, led to a jump in bond yields in the US and other developed markets. Analysts say that a spike in bond yields in developed markets drives money away from emerging markets like India into the US bonds. 

A.K. Prabhakar, head of research at IDBI Capital, explains why the FIIs chose the flight mode: “Rich valuations, which the markets were commanding last year when index was trading at record highs, was also a major factor for their withdrawal from Indian equities.” 

So, why the sudden change of heart after an exodus that lasted almost nine months? One possible answer lies with Nifty. 

The Return Of The FIIs

After hitting a 52-week low and touching a low of 15,183 last month, Nifty plunged 18 per cent from record high hit in October last year, a few percentage points shy of entering the bear territory. That was one of the reasons for FIIs to start nibbling at stocks in India again, analysts say. Last time the FIIs had invested Rs 35,472 crore in June last year.

In the correction that followed, some blue-chip stocks fell 40-50 per cent which also led to heightened interest towards Indian shares. 

At the same time, India outperformed key global markets in July despite various challenges. All major sectors rose month on month in July and the indices saw the outperformance of mid-cap shares. 

Powered by FIIs’ investment in July, India's Nifty 50 became the world's second best-performing index after the S&P 500 in dollar terms by advancing 8 per cent, data from brokerage firm Motilal Oswal showed. 

Here To Stay?

Analysts say that the FIIs’ investment in India is likely to continue as fears of recession in the US are forcing funds to look at the Indian economy amid a dip in valuations. 

“Compared to recessionary fears in the US, there is a growth momentum in India and the money that chases growth momentum has started to flow towards Indian equities,” says Ashish Chaturmohta, director and head of equity advisory research, JM Financial. 

A sharp upward movement in the Indian markets, which saw the Nifty 50 index surge over 8 per cent in July, also led to FIIs feeling left out and they have started to make a comeback, adds Chaturmohta. 

“Once they (FIIs) decide to come back, we can see record highs on Nifty. After continuous selling, there is a sigh of relief as they have started buying slowly and that will give support to the markets. We are not sure about the quantum of their buying but the selling has been absorbed,” he adds. 

Agrees IDBI Capital’s Prabhakar. Post October, FII flows are likely to strengthen and they will not be sellers in markets like we have seen before, he reiterates.