Foreign investors now in 'buy' mode

Foreign institutional investors (FIIs) have been net buyers in the Indian stock market since the central bank indicated a coming pause in its monetary tightening policy and European Union (EU) leaders agreed to a bailout plan to contain the region’s debt crisis.

In just five sessions since the Reserve Bank of India’s (RBI) monetary policy announcement on October 25, FIIs have net-purchased Indian shares worth Rs 3,147 crore ($644 million), showed data on the Securities and Exchange Board of India (Sebi) website. For the week ended November 2, India-focused equity funds registered their biggest retail investor inflow since mid-December 2010, according to EPFR Global, which tracks fund flows into world markets.

“The RBI signalling a pause to monetary tightening should put a floor to market valuations,” said Bharat Iyer, executive director and head of India equity research at JP Morgan.

RBI has raised interest rates on 13 occasions since March 2010 to tackle inflation. India’s wholesale price index-based inflation, at 9.72 per cent in September, has remained above nine per cent in this year.

“All emerging markets have rebounded from their lows of early September in late October and India, too, has benefited from this trend,” said Arjuna Mahendran, Singapore-based managing director and head of investment strategy for Asia at HSBC Private Bank. “Inflation has proved more stubborn than was earlier expected in several emerging markets. However, we expect inflation to stabilise at current levels and recede mildly in the coming months. This will provide good support for emerging stock markets in the coming months.”

After purchases worth $29.4 billion in 2010, FII inflows in India this year so far have been moderate, at $558 mn, as high interest rates and euro zone debt concerns have tempered investors’ enthusiasm.

Inflows in the next few weeks would largely depend on how the global scenario pans out in the euro zone and the US, experts say.

Further upside momentum for emerging markets like India will depend on policy developments in the US concerning extension of consumer tax cuts and a sustainable plan for reducing government debt, says HSBC’s Mahendran.

“Although India witnessed net outflows of $281 mn in the last month (from global funds), two consecutive weeks of inflows probably indicate a change of trend,” said Saifullah Rais and Sunita Baldawa of Kotak Institutional Equities.

Flows from exchange-traded funds into Indian market also remained positive in October, at $61 mn, according to a fund flow-tracker note from Kotak Institutional Equities.