FIIs inflows to gain traction on economic recovery; tapering a roadblock

Mumbai, Dec 30 After a massive pull-back of funds from equities, FIIs' inflows are expected to gather strength in 2022 on the back of faster economic recovery in India, analysts opined.

Lately, US Fed's tapering measures, high valuations and volatile global environment drove away foreign investors from the equity market.

Accordingly, higher interest rates in the US and other developed economies drive away FIIs from EMs such as India.

Besides in 2021, India sharply outperformed most of the global markets. This resulted in valuations turning expensive.

The trend led many foreign broking houses to downgrade Indian equities as the risk reward turned unfavourable.

Furthermore, large fundraising in the primary market exerted further pressure on the secondary segment.

Consequently, FIIs turned sellers in the secondary market, having sold Rs 55,000 crore worth of equities for the full year, they bought heavily in the primary market to the tune of more than Rs 80,000 crore.

"With more than 10 per cent correction witnessed recently, valuations are no longer expensive. Further India witnessed highest GDP growth globally among the emerging economies while many other economic parameters are seeing sustained pick up and have crossed pre-covid levels," said Sneha Podar, AVP Research, Broking & Distribution, MOFSL.

"The earnings momentum too is expected to continue as we are in the beginning of a new earnings cycle. Hence we expect the FII flows to return in 2022 in the secondary market. Primary market too would continue to attract FII interest given the humongous IPO pipeline planned for 2022."

According to Vinod Nair, Head of Research at Geojit Financial Services: "FIIs have been net sellers in the Indian market since April 2021 anticipating a change in the world equity market due to tapering & high valuation. And their selling has been lower than in other EMs, and raised as the best performing peer."

"The reduction in QE has started and valuation is moderating. Post the ongoing consolidation, the future investment pattern will be in-line with improvement in the economy. We presume that the Indian market is in the last phase of a consolidation and inflows will improve by the later part of the year."

The FIIs had invested more than 1.35 lakh crore in 2019, and more than 1 lakh crore in 2020, however, in 2021, they invested only about Rs 51,000 crore.

"If we look at FII activity over the previous three calendar years, we can see that it has been steadily declining," said Gaurav Garg, Head of Research, CapitalVia Global Research.

"The factors include a sudden spike in Omicron cases to Indian markets trading at higher valuations and, most notably, the US central bank's (FED) intention to raise interest rates. We anticipate FIIs will keep a close eye on other emerging countries and increase interest rates in the bond market in 2022, rather than pumping as aggressively as they did in the past."

Notably, the largest outflow occurred in December, with FIIs withdrawing more than Rs 28,000 core as of December 28.

"Compared to 2021, the outlook for FPI flows in 2022 is a bit subdued as of now. Liquidity tightening and rise in interest rates globally could impact flows into all markets other than the US. This will be more in the case of emerging markets," said Deepak Jasani, Head of Retail Research, HDFC Securities.

"Due to reversal of carry trade, we may see outflows from FPIs coinciding with rate hikes by the US Fed. However if India's macros remain steady and micro performance continues to improve, we may see Indian attracting flows from FPIs later in the year at the expense of other markets."

In addition, Sunil Nyati, Managing Director of Swastika Investmart said: "FIIs have already sold a lot and the overall outlook of the Indian equity market is very bullish therefore they will again start to buy soon in our market."

"Generally, they start to come back to the Indian market after the 15th of January of the new year."

(Rohit Vaid can be contacted at [email protected])