Foreign investors infuse over Rs 15,000 crore into Indian equities amid positive sentiments

Foreign investors infused Rs 15,352 crore into Indian equities during the first half of this month, driven by the government's commitment to ongoing reforms, low US Federal rates, and strong domestic demand.

"The upcoming Union Budget will be one of the most watched events by foreign investors to understand the government's plans for economic growth," said Himanshu Srivastava, Associate Director - Manager Research at Morningstar Investment Research India.

According to data from the depositories, foreign portfolio investors (FPIs) have made a net inflow of Rs 15,352 crore in equities this month (up to July 12). This follows an inflow of Rs 26,565 crore in equities in June, spurred by political stability and a sharp market rebound.

Prior to this, FPIs withdrew Rs 25,586 crore in May due to election uncertainties and over Rs 8,700 crore in April over concerns regarding a tweak in India's tax treaty with Mauritius and a sustained rise in US bond yields.

Manoj Purohit, Partner and Leader - FS Tax, Tax and Regulatory Services, BDO India, noted that the latest FPI flow can be attributed to positive sentiments, the stable government's assurance on the continuity of reforms, tepid US Fed rates, and strong domestic demand. Additionally, the anticipation of a reform-oriented budget has also lifted investor sentiment. Srivastava added that a better-than-expected earnings season has further bolstered investor confidence.

Beyond equities, FPIs invested Rs 8,484 crore in the debt market during the period under review, pushing the debt tally to Rs 77,109 crore for the year so far.

The unpredictable nature of FPI flows contrasts with the consistent growth of domestic institutional investors (DIIs), including mutual funds' flow. DIIs have been consistent buyers every month in 2024, while FPIs have alternated between buying and selling. FPIs sold a cumulative Rs 60,000 crore in January, April, and May but bought Rs 63,200 crore in February, March, and June combined.

"The reason for this divergence is that FPI activity is influenced by external factors like US bond yields and valuations in other markets, while DII activity is largely driven by domestic flows into the market," explained VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Abhishek Banerjee, smallcase Manager and founder at Lotusdew, noted that FPIs have a great opportunity in India to earn high returns in foreign currency, benefit from rising stock prices, and gain from falling bond yields. However, he cautioned that Chinese markets are currently much cheaper, posing a challenge for investors deciding between chasing momentum or seeking value.

In terms of sectors, Vijayakumar pointed out that better-than-expected results from IT majors so far indicate the potential for FPIs to buy into these stocks, where valuations are not excessive.