Foreign investors stock up on Indian stocks with a record net inflow of Rs 1.4 trillion

Foreign Portfolio Investors (FPIs) have made a net outflow of slightly more 1 lakh crore in 2020 so far, although hybrid instruments witnessed a net inflow of more than Rs 10 billion, based on the latest data available from depositories.

Market men expect a similar trend to continue for a few months unless there is a major change in the overall investment scenario.

“With some important developments on the COVID-19 vaccine front, India will benefit. Furthermore, the growth of the economy will improve investor sentiment and outlook towards India. From a risk-reward profile perspective, these aspects they make India a good investment destination, “said Himanshu Srivastava, Associate Director – Research Manager, Morningstar India.

However, if the economy remains weak for a longer period of time, that could be a major impediment. Also, if there is another wave of the coronavirus pandemic that results in the re-implementation of lockdown measures, that could dampen sentiment and make foreign investors risk averse, he added.

As 2020 draws to a close, FPIs so far have made a net inflow of Rs 1.42 million lakh – the highest level of investment of this type in a calendar year since 2002.

This is the fifth time in history that foreign investors’ net investment in equities has crossed 1 lakh crore marks in a year. Prior to this, the feat was accomplished in 2019, 2013, 2012 and 2010, when foreign investors injected a net sum of Rs 1.01 lakh, 1.13 million lakh rupees, 1.28 crore lakh and Rs 1.33 million lakh respectively.

On the other hand, debt markets have seen FPIs become net sellers in 2020 as they withdrew a massive amount of Rs 1.07 lakh crore of debt, however, they invested a net amount of Rs 23,350 crore in debt-VRR. The Voluntary Retention Path (VRR) channel was introduced by the Reserve Bank of India (RBI) in March 2019 to attract stable and long-term FPI investments to debt markets.

Generally speaking, investments through this route are free from macroprudential and other regulatory standards applicable to FPI investments in debt markets, provided that the FPIs voluntarily commit to retain a required minimum percentage of their investments in India. for a specified period.

The year 2020 marked the largest exit of foreign investors from the debt markets since 2002, when the net investment data bifurcation became available.

The previous record exit was in 2013, when FPIs drew a net sum of Rs 50,849 crore from debt markets. Also, an exodus to the melody of Rs 47,795 crore was noted with such instruments in 2018.

Taking all asset classes together, FPIs have made a net investment of Rs 68.2 billion ($ 9.3 billion) in Indian capital markets (Equities, Debt, Debt-VRR and Hybrids) so far in 2020, with a few trading days still to go.

While FPIs have made gross purchases by value 20.7 lakh crore so far this year, they have sold securities for value 20 lakh crore on all instruments.

By comparison, the net inflow to Indian capital markets was Rs 1.36 crore in 2019. This comprised a net investment of Rs 1.01 crore lakh in shares, Rs 25,880 crore in debt and around 9 billion rupees in hybrid securities.

Experts said that the availability of excess liquidity in the global financial market, an attractive valuation compared to developed markets and the weakness of the US dollar have supported the purchase of Indian stocks.

Nirali Shah, Senior Research Analyst at Samco Securities, said that 50 percent of foreign inflows into India have been made through Qualified Institutional Placements (QIPs) and sales of strategic holdings such as the HUL-Glaxo deal and half The remainder has been made through purchases in the secondary market. .

An important factor for the massive inflows could be the weakening of the dollar, which has caused a change of money towards emerging countries, given that their interest rates are on the lower end and the yield adjusted for inflation is much higher, he added. .

According to Morningstar’s Srivastava, one of the main reasons to invest in stocks is the availability of excess liquidity in global financial markets and major central banks announce stimulus packages to get their economy back on track.

India is not the only emerging country that has seen an avalanche of foreign inflows, and other emerging markets have also witnessed strong investments in proportion to their weight in the world economy.

“India has attracted more than a fair share of emerging market inflows due to a stronger-than-expected economic recovery, moderation in active COVID-19 cases since mid-September, and a supportive policy framework in terms of of an accommodative monetary policy and fiscal boost to promote the manufacturing sector, “said Gaurav Dua, senior vice president and director of investment and capital markets strategy at BNP Paribas Sharekhan.

Additionally, FPI flows received a boost from a positive surprise in second-quarter corporate earnings and some structural reforms in the labor, agriculture and financial sectors, said Alok Agarwala, research director at Bajaj Capital.

“Government initiatives to attract FPI / FDI investors by holding investor conferences, making structural changes to facilitate conducting business, announcing long-term measures such as AatmaNirbhar Bharat Production Linked Incentives (PLI) have resulted in positive flows to India, “said Divam Sharma, co-founder of Green Portfolio.

On the other hand, foreign investors do not seem to have a positive inclination towards Indian debt securities in the current scenario. In fact, there has been a massive shift from debt to equities, as equity markets have seen a higher than expected rate of recovery.

“The debt market has been in crisis lately due to increased credit risk. Given the strain in the economy and limited scope for further rate cuts, equity markets offered a much better opportunity after the sharp correction in the early part of this year and that resulted in an exit from debt markets, “said Dua.

Green Portfolio’s Sharma said the spread of government securities (G-Secs) with corporate bonds has narrowed, prompting FPI to sell debt instruments.

Furthermore, the cost of government and corporate funds has moderated due to monetary easing and the infusion of liquidity from the RBI, making debt markets less attractive due to falling yields.

By sector, banking, financial services, information technology, and consumer goods consumption have attracted higher IPF inflows.

According to Sharma, there is a growing conviction to invest in technology solutions as people continue to work from home, consume more online and reduce physical contact.

When it comes to investing in stocks, it was a good year to start, as FPIs invested almost 14 billion rupees in inventory during January-February. They went up for sale in March while selling net assets 62 billion rupees, largely as a result of the coronavirus outbreak and the resulting risk-off environment.

Uncertainty about the severity of the pandemic’s impact on the global economy and financial markets around the world prompted a flight to safety among foreign investors who rushed out of relatively riskier investment destinations such as emerging markets such as India.

The sell-off continued in April, although the net exit pace slowed significantly due to measures announced by the government and the RBI periodically to revitalize the sunken economy.

FPIs returned in May and the positive momentum continued through August as they pumped out a net amount of 91,000 crore during the period under review.

This could be attributed to an attractive valuation of Indian equities following the strong correction in March and the significant depreciation of the Indian rupee against the US dollar, providing FPIs with a fairly good entry point.

In addition, the lifting of the blockade restrictions and the government’s efforts to boost economic activity in the country also garnered a positive response from foreign investors.

Certain technical factors, including the issuance of rights to underwriters by Reliance Industries, also attracted significant foreign flows.

However, the scenario was reversed in September when FPIs converted net sellers to stocks. The exit was largely triggered by concerns about the country’s economic growth and growing border tensions between India and China.

The country’s gross domestic product contracted by a whopping 23 percent for the quarter ending June 2020, which took a toll on investor sentiments. Foreign investors were also on the sidelines, as COVID-19 cases in Europe and other countries renewed fears of a possibility of further lockdowns, thus dashing hopes for a rapid economic recovery.

However, the opening of the domestic economy, the resumption of business activities, better-than-expected quarterly results, and a drop in India’s active COVID-19 case count helped drive foreign investors back into stocks. Indians in October, November and December.

Going forward, Bajaj Capital’s Agarwala said that the pace and sustainability of the earnings recovery (as shown in Q2FY21) and the global liquidity situation are the key factors that will determine FPI flows in Indian equities in 2021.

He further said that FPI flows on Indian bonds are likely to pick up once real interest rates turn positive, which is unlikely to happen before the fourth quarter of the current fiscal year.

This story was published from a news agency feed with no changes to the text. Only the title has been changed.

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