FII, mutual fund buying takes Indian stock markets close to new highs

The Indian markets are staring at fresh all-time highs, even as foreign and domestic investors have joined forces, following the surprise rate-cut announcement by the government last month. The benchmark Sensex and Nifty had gained more than 10 per cent since September 19, when they had ended at seven-month lows.

During this period, foreign institutional investors (FIIs) have pumped in nearly Rs 17,000 crore, while mutual funds (MFs) have been net buyers to the tune of Rs 9,000 crore. Currently, the Sensex is only 1 per cent away from its record high of 40,268 made in early June. Another 2 per cent gain in the Nifty could see the 50-share index surpass its previous record of 12,089 logged on June 3.

While buying by MFs has more or less been a permanent feature in the past few years, it is fairly uncommon for the institutional investors to remain net buyers in a single calendar month — as witnessed during September and October. Market players say overseas investors turning positive are a big sentiment booster, even though the extent of buying hasn’t been robust.

Andrew Holland, chief executive officer (CEO), Avendus Capital Alternate Strategies, said the government’s decision to cut corporate taxes has helped revive foreign institutional investment flows. Also, expectations of further easing of taxes, coupled with improvement in the global risk sentiment, has helped, he added.

“Risky assets have been doing well amid progress in the US-China trade talks and Brexit. The conditions for global risk on trade have turned favourable,” said Holland.

Jyotivardhan Jaipuria, founder and managing director, Valentis Advisors, said, “The valuations were reasonable. With corporate tax cuts, the government has sent a clear message it was listening to the grievances of investors.”

The equity markets went through turbulence in July and August amid sharp pull-back by overseas investors. The combined selling during the two months was nearly Rs 30,000 crore. The selling was attributed to disappointment from the Union Budget and pessimism triggered by slowing economic growth — both domestically and globally.

In the past two months, a little over a third of the FII outflows have been reversed. Many believe a sustained revival in overseas flows will require the easing of global and domestic headwinds. “Apart from the global environment turning positive, some macro indicators like auto sales volumes need to bottom out,” said Rajat Rajgarhia, CEO-Institutional Equities, Motilal Oswal. “Moreover, hopes of further reforms in India have kept investors excited,” he added.

Analysts say a rate in the dividend distribution tax and buyback tax could fuel further buying by FIIs. Market players said the revival in the economy and earnings will determine foreign portfolio investment and domestic institutional flows. Further reforms by the government — whether it is the abolition of the dividend distribution tax, strategic disinvestment, and individual tax cuts — will be the other key factors. The US Federal Reserve’s (Fed’s) policy stance will also be keenly watched by foreign investors.

“There is a general expectation that the Fed will cut rates. But more important will be the Fed’s guidance. The global markets are at an all-time or close to all-time highs; the US-China trade dispute seems to be close to a resolution. Foreign portfolio investors will be closely watching the Fed’s policy stance in the changed global scenario,” said Jaipuria.