India remains a bright spot for foreign fund inflows

Chennai: Like the seasonal bird migration, the foreign institutional investors (FII) who took a flight out of India last year are coming back. And that is not without reasons. They may however, fly out again, said experts.

As per the macro fundamentals, the Indian economy is doing pretty well in terms of growth by annual projection. India will be the fastest growing country in 2023 with industry growing at 5.8 per cent according to analysts' estimates.

“Till 2027, India will be the fastest-growing major economy of the world. In terms of other macro indicators and high frequency data, most of these data are showing India's economy is doing reasonably and are in the positive zone,” Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited, told IANS.

Adding further Azeez said, India is doing better than most of the peers and as far as the corporate fundamentals are concerned; the corporate earnings growth between quarters ending September till quarter ending December were the ones that showed a lot of demand.

“In fact, at the index level there was a decline, but further results are much better and there is some kind of earning traction coming while at the overall level, the volume numbers are on the softer side, there is a margin expansion which is happening,” Azeez said. From a liquidity perspective, the Indian equity market remains in a sweet spot, particularly the domestic liquidity.

The valuation for Indian equities is significantly below the average since 2017. More or less at the median for the last year, average valuation is also fine; it's not extremely compelling and quite comfortable, Azeez said.

On the reasons for the earlier flight of FIIs, Parth Nyati, Founder at Tradingo, told IANS: “During periods of sudden surges in interest rates in the USA, a common phenomenon is the movement of funds from emerging markets such as India to the US debt market. However, with indications that the US may be nearing peak interest rates and considering the Indian economy's status as one of the fastest-growing globally, a shift is occurring.”

Azeez said: "In calendar year 2022 we saw FPI net outflows amounting to Rs 1.21 lakh crore in equities. The significant part of outflows were in the first half of 2022, where we witnessed nearly 2.2 lakh crore outflows.

“In the second half of 2022 we saw reversal in trend and the FPI inflows amounted to Rs.96,000 crore. Although the FPI have been net sellers in Jan and Feb-23 (Rs 34,000 crore outflows) we have seen more than Rs. 54,000 crore inflows since March-23 ($6.6 billion).”

However, the landing of FII money again will not be long term one as the chances of them taking off are high if inflation goes up in India and the geopolitical situation turns negative.

“Furthermore, any unfavourable surprises in government policies, especially in light of upcoming elections, may also disrupt the mood of FIIs. However, it is worth noting that the current outlook is optimistic, and there is an expectation that such negative surprises may not materialize,” Nyati added.

During the period from April 2021 to February 2023, FIIs sold a significant amount totaling Rs 4.7 lakh crore in the Indian market. However, the impact of this selling pressure was mitigated by the strong investment activity of domestic institutional investors who injected a total of Rs 4.07 lakh crore, largely attributed to robust systematic investment plan (SIP) flows. This influx of domestic investments played a crucial role in preventing the Indian market from entering a bearish phase, even as global markets faced challenges, said Nyati.

With the markets going up, the two industry officials are of the view that the domestic institutional investors (DII) will not book profits.

“We do not see domestic institutions exiting or booking profits now. This year for the market has been range bound, with fair valuations and earning visibility have been on the lower side. The inflows have been steady, however, investors may be in a wait and watch mode for better valuations,” Azeez said.

Profit booking tends to occur when FIIs display significant buying activity at higher market levels, said Nyati.