FIIs head back as macro headwinds ease

Foreign institutional investors (FIIs) have returned with a bang. Over the last seven trading sessions, they have pumped in close to $2 billion into Indian equities. Most market players expect this to continue as they see macro headwinds easing.

After shunning Indian equities for most of the calendar year, foreign brokerages and research houses have re-rated India. With valuations looking attractive (15 X FY 12 earnings), the tide seems to have turned.

The inflows have caused the Nifty to rally 7 per cent in the last two weeks. It is now 114 points shy of its 200-day moving average of 5,746.

RBS, a leading investment bank, said the Nifty could touch 6,000 by year-end, as interest rate issues would be behind India by then. However, the inflows would not be as high as last year, it said.

While India’s long-term story remained convincing, the macro-economic headwinds — be it sticky inflation, rate tightening or the policy paralysis — were a big deterrent for FIIs this year.

A lot has changed since then. Ramit Bhasin, managing director and head of global markets, RBS, says, “The headwinds that were impacting India will no longer be there in the second half of the year and we can see a 10 per cent upside by the end of the year from these levels. We will continue to trade in the 5,300-5,800 range till Diwali, before breaking out on the upside. I expect RBI to raise rates by 25 bps (basis points) in July and then pause.”

The immediate trigger for FIIs is the fall in crude oil prices and settlement of the Greece debt problem. Vibhav Kapoor, group chief investment officer, IL&FS, says, “The sentiment has improved because the market has remained at more or less the same level for a couple of years and, hence, with the sentiment improving, it is no more looking expensive to long-only FIIs.”

Be it the tightening by RBI or the government’s decisions on key policy issues – like an increase in prices of petroleum products and moves towards opening the retail sector to foreign direct investment — everything seems to be coming together for the Indian markets, says Kislay Kant, head of research at MAPE Securities.

Leading foreign brokerages like Nomura and UBS have turned positive on India. Also, the Indian markets saw sharp corrections and, therefore, the downside risks were limited, said Anand Shah, chief investment officer, BNP Paribas Mutual Fund.

Technically, the markets should have moved up further as India’s economy is expected to clock a gross domestic product of $2 trillion compared to $1 trillion a few years ago. Few countries can boast of such growth. Aditya Narain, managing director, Citi India, said the good thing was that companies continued to plan, invest and position for a more robust, longer-term outlook.

“Also, consumer demand remains relatively positive. Adjusting for the increase in interest rates, we see earnings growth remaining at 18-19 per cent,” he said. Easing of both demand-driven inflation and rate pressures will be big positives for the markets. What’s in store going forward? Very much like the US markets, the Nifty will be range-bound. While corporate India will suffer the effects of a slowdown in the first and second quarters, growth will recoup by third and fourth, say analysts.