IT and Pharma poised to gain from FII inflows: Here's why?

As the US Federal Reserve hints at three rate cuts in the upcoming year, market sentiment on Dalal Street suggests a strong return of Foreign Institutional Investors (FIIs) to Indian equities. December has already witnessed FII investments of Rs 29,700 crore after a three-month sell-off totaling Rs 75,000 crore. Analysts and fund managers anticipate robust FII inflows due to the easing dollar, cooling bond yields, and expected rate cuts.

Large-caps, particularly Nifty 50 stocks, are in focus as liquidity won't be an issue for significant investors. A Moneycontrol analysis indicates that IT, pharma, and specific banks could benefit the most, having experienced the highest reduction in FII stakes since the rate hike cycle commenced in 2022.

In major IT companies like Wipro, TCS, LTIMindtree, and Infosys, FII stakes are 2-3 percentage points below the peak holding during the rate hike cycle. Tech Mahindra shows a wider difference of 9 percentage points. With the rate cycle turning, analysts anticipate a resurgence in significant deal wins for these companies.

Pharma is also poised to benefit, with stocks like Cipla and Divi's Laboratories experiencing a 3-5 percentage point fall in FII stakes during the rate hike cycle. On the other hand, Sun Pharma and Dr. Reddy's have seen an increase in FII stake.

Financials, particularly banking stocks, are expected to witness a rise in FII holdings as their stakes have fallen from peaks. Analysts predict an overall credit growth of 15-17 percent in the next two years, supported by shallow rate cuts by the Reserve Bank of India (RBI). The absence of imminent asset quality issues adds to the positive outlook for the banking sector.

As the trend of FII inflows gains momentum, large-cap IT, pharma, and banking stocks appear well-positioned to capitalize on the anticipated market surge.