Foreign investors make a strong comeback

FIIs pump in $1.4 billion in March, after pulling out $2.9 billion in Jan-Feb

Foreign investors are back with a bang in the domestic equity market. After having pulled out nearly $2.9 billion from Indian stocks in the first two months of the year, foreign institutional investors (FIIs) have pumped in around $1.4 billion is only nine sessions, triggering a sharp jump in stock prices. This is the biggest unbroken investment spree since February last year, when FIIs had pumped in $2.9 billion in 19 consecutive trading sessions.

The latest bout of capital inflows were due to improvement in risk appetite amid a rebound in global commodity prices, experts said. Other emerging markets, including South Korea, Taiwan and Brazil, have seen FII flows greater than India in March.

"The relief rally in Indian equities was also boosted by the improved external environment. Global commodity prices firmed further and have been a source of relief," said JPMorgan in a note co-authored by Bharat Iyer, Bijay Kumar and Adrian Mowat.

The turnaround in foreign flows has coincided with the Union Budget on February 29, in which the government provided a relief to the market by sticking to fiscal deficit targets and increasing rural spending. "Foreign investors have been buyers on a daily basis after the Budget, which provided some comfort on reforms and the fiscal path," said U R Bhat, managing director, Dalton Capital Advisors. "However, it's early to say that FIIs have turned very positive on India. Near-term triggers like earnings and a good monsoon are critical," he added.

India-focused global exchange-traded funds (ETFs) after two straight month of outflows, received positive flows this month, data compiled by Bloomberg showed.

As seen on previous occasions when India used to attracted more than its fair share of capital flows, this time flows have been less than to smaller markets such as Brazil and Taiwan. So far this month, Brazil has attracted FII flows of $1.5 billion, South Korea has received about $1.6 billion, while India has got nearly $1.4 billion.

Kotak Institutional Equities Research in a report last week said India's allocation in global emerging market (GEM) funds and Asia-ex Japan funds had come off in recent months. GEM funds allocated around 12.5 per cent of their assets to India in January, down from 13.2 per cent in September last year. The allocation in Asia ex-Japan funds, too, has come by similar amount to 14.1 per cent in January. The Indian market, however, still enjoys an overweight position, which experts said makes it more vulnerable in turbulent times.

"Certainly more foreign selling cannot be ruled out given the continuing overweight stance," said Christopher Wood, managing director, CLSA in the recent Greed and Fear newsletter. CLSA expects "renewed risk aversion globally sooner or later".

In the immediate term, global investors will focus on the outcome of the US Federal Reserve's two-day meeting that begins Tuesday. Economists are not expecting the Fed to raise rates, however, the market will look for future guidance. "The focus in the week ahead will remain on central banks with both the Bank of Japan and the Fed meeting. The Fed won't be raising interest rates but it is likely to indicate that while it intends to raise interest rates further this year it is aware of the risks of slower global growth and so will proceed cautiously," said Shane Oliver, head of investment strategy and chief economist, AMP Capital.

Oliver expects 2016 to be a good year for equities thanks to "a combination of relatively attractive valuations compared to bonds, further global monetary easing and continuing moderate economic growth".