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Foreign portfolio investors (FPIs) have pumped in over $25.4 billion into the Indian equity and debt market segments thus far in calendar year 2017 (CY17), data with the National Securities Depository Limited (NSDL) show. The flows, analysts say, have come in on expectation of a revival in India's economic growth and recent government-backed reforms, especially in the banking sector.
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Of this, the investment in the debt segment is a staggering $16.9 billion (Rs 109,389 crore), while $8.5 billion (Rs 55,959 crore) has been invested in the equities segment, NSDL data show.
The investment pertains to all the activities undertaken by FPIs/FIIs in Indian securities market, including trades done in secondary market, primary market and activities involved in right/bonus issues, private placement, merger and acquisition, etc.
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As regards the equity segment, the abundant liquidity has taken the benchmark indices - the S&P BSE Sensex and the Nifty50 - nearly 22 per cent higher to become the best performing market globally on year-to-date (YTD) basis.
"The global liquidity normally finds its way into the outperforming emerging markets and India seemed to be a like a 'text book solution' for absorbing a part of this. Interestingly, the new found domestic liquidity which lately realised that there are hardly any other asset classes providing the returns the equity markets are, have started pouring in larger quantum into the hitherto forbidden asset class," explains Ambareesh Baliga, an independent market analyst.
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On Tuesday, the Nifty50 index hit the 10,000 mark for the first time in history in intra-day deals. The rally in mid-and small-caps has been sharper, with S&P BSE Mid-cap and S&P BSE Small-cap indices surging over 30 per cent during this period.
Going ahead, experts feel that India will continue to attract flows from domestic and foreign investors given a stable political environment, upturn in economy, policy reforms and hope of a revival in corporate earnings over the next few years. Though in the near-term there could be aberrations / withdrawals, such rotations are a normal part of the tactical shifts in allocation that all funds make periodically, they say.
"Things seem to be favourably poised for India from a global perspective for now. Commentary from the global central banks has been fairly positive thus far and has been digested well by the markets. On the domestic front, the economic environment is stable and the corporate earnings will pick up gradually. All this augurs well for flows into the Indian markets," says Tirthankar Patnaik, India Strategist at Mizuho Bank.
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Back in CY14, FPIs had invested $42.4 billion in the Indian markets - the highest amount since CY2000 following the victory of Narenrda Modi - led National Democratic Alliance (NDA) in the general elections. They made net investment of $10.8 billion in 2015, but tuned net sellers in 2016 to the tune of $3.2 billion.
However, there are some concerns as well. Patnaik, for instance, is worried about the falling exports over the past three months, which could derail the overall economic pick-up and hamper flows. Besides, corporate earnings now need to catch up for the rally and pace of flows to sustain. The overall market however, could remain buoyant given the flows from the retail investors, experts say.
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"PE (price-equity) multiple expansion rather than earnings growth explains nearly all of the performance this year for India. The risk - reward fundamentally is clearly unfavourable but we acknowledge that local retail flow can keep markets elevated despite the absence of a near-term growth recovery," says Gautam Chhaochharia, head of India research at UBS Securities in a recent note.
Given the risks, UBS has revised its end-2017 downside scenario for the Nifty50 index to 7,500 levels (based on 15x PE) and upside the scenario to 10,000 (based on 18x PE).