FPIs coming back to India: What makes them buyers again and what’s expected going ahead?

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Foreign portfolio investors (FPIs) have been on a buying spree in the Indian market since March this year.


For the current calendar year, however, they are still in the red as the outflow in January was massive.

FPI flow in 2023 so far.

FPIs turned to the Chinese market from the Indian market after Beijing lifted Covid restrictions and opened its economy. At that time, the Chinese market was very cheap while India was at a premium to its historical valuation.

FPIs hoped that their investment in China will give them better returns and they were right.

China’s Shanghai Composite Index is up about 10 percent this year so far against a two percent fall in the Indian benchmark Sensex.

FPIs coming to India, but slowly

India has been one of the best investment destinations for FPIs among emerging markets since March. But if we see carefully, they are not investing heavily in the Indian market. In fact, they are picking stocks very selectively. FPIs are buying capital goods, construction and FMCG and selling IT and oil and gas.

FPI net investment in the first three months of 2023 has been negative each month. March 2023 was positive only due to the one-off equity investment in the Adani Group. However, April’23 has been a good month to date.

Betting on the India story

FPIs appear to be betting on India’s growth story. As the correction in the Indian market In January and February gave comfort on the front of valuation too, they want to reap the benefit of India’s resilient economy when the West is trying to avoid recession.

“The Indian broader indices had corrected nearly 10 percent from their highs, making their valuations attractive as compared to other emerging markets. FPIs were net sellers in the months of January and February 2023. Barring a huge deal, FPIs were net sellers in the month of March too,” Sanjay Moorjani, Research Analyst at SAMCO Securities, observed.

“Given the recessionary conditions across the globe, India’s growth potential remains the highest in the world. This could add as a fillip and foreign flows would come back soon,” said Moorjani.

Kaizad Hozdar, Investment Advisor at TrustPlutus Wealth, also believes India’s growth story is a major factor that has attracted FPIs.

“As per the latest figures from the IMF, world GDP growth is estimated at nearly 2.8 percent in the year 2023 which is close to the decadal low of 2.6 percent attained in 2019. A major slowdown in growth is expected in US and Europe while India is likely to grow at about 6 percent in the financial year 2023-24 (FY24). We believe this is one of the prime reasons why FPI flows are likely to gravitate towards India over the next few months,” said Hozdar.

“India benchmark earnings are likely to grow at about 10 percent in FY23 and between 10-15 percent in FY24. This growth stands out as an oasis in the current season of drought in the earnings prospects of the other large economies,” Hozdar said.

Arun Chulani, Co-founder at First Water Capital Fund, also highlighted that FPIs are once again coming back to India because they have seen how robust the India growth story is.

“Of course, India is not an island and will not be unaffected by the global headwinds, but with our internal domestic engine still on, we hopefully will be less impacted. Also, it is likely that the FPIs have seen what the other opportunities there are out there geographically and in comparison, India probably looks like a beacon of growth,” said Chulani.

“China has a big pull when it comes to attracting foreign investors; they have done a fantastic job in industrialisation and urbanisation over the last few decades. But as history shows, the baton of growth gets passed on and hopefully India will be the one to benefit next and take advantage of the passing trade winds,” Chulani said.

“India should hopefully grab this opportunity with both hands and especially more so if the government is aligned,” said Chulani.

Weakness in the dollar index and rate hikes hitting their peaks are also positive for emerging markets.

Hozdar observed that the dollar index which peaked out 7 months back at about 115 is now on the verge of cracking below the 100 mark. This is positive when seen from the point of view of FPI flows into emerging markets.

“The FPI outflow seen in the first quarter of the calendar year 2023 could be partly attributed to China relaxing its Covid curbs and re-opening its economy. Now looking ahead, it would be reasonable to assume that flows would get directed to regions where the earnings growth is superior,” said Hozdar.

“The interest rate hike cycle is now at its fag end which too could help funds flow to emerging markets. Our inflation is now likely to not only come within the RBI’s comfort zone but more importantly is likely to remain in the zone as most commodities are seeing bearishness due to weak global growth prospects,” Hozdar said.

What could be the trend?

It is unlikely that there will be a strong shift of foreign funds from China to India. India may continue to see inflows due to its bright economic outlook and pause in interest rate hikes.

However, China too will remain a beneficiary of foreign fund inflows as investors hope the country’s growth will beat expectations.

In fact, the Chinese economy has started showing signs of recovery. Its first-quarter gross domestic product rose sharply.

“China GDP grew by 4.5 percent in the first quarter. That marks the highest growth since the first quarter of last year — when China’s economy grew by 4.8 percent — and better than the 4 percent forecast in a Reuters poll. Quarter-on-quarter, the economy grew 2.2 percent,” said a CNBC report said.

As Rajnish Girdhar, CEO of Karma Capital, explained: “Global allocators look at the emerging markets as one asset class. China being a heavyweight has a huge contribution to that asset class performance. Most allocators look at it as complementing rather than competing geographies for allocation. It would be unfair to look at it as India versus China, as in the current circumstances both will be beneficiaries.”

The views expressed are the authors own. Please consult your financial advisor before making any investment decisions.


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