Foreign portfolio investors pour in $6 billion in the past two months

Flows have accelerated since corporation rate cut, lifting benchmarks by 13%

Foreign portfolio investors (FPIs) are pouring money into the domestic market at an unprecedented pace. The net investment by overseas investors into the equities cash segment has topped 

$6 billion (Rs 44,000 crore) in the past two months. The rolling two-month FPI flows into the domestic market currently is the highest since May. 

The sharp flows have helped the benchmark Sensex and the Nifty surge 13 per cent in just two months. 

The earnings-boosting move of lowering corporation tax rates in September, coupled with easing monetary policy globally, are seen as the reasons for sharp inflows into domestic equities. 

“The improvement in foreign flows is aided by improving global liquidity,” says Vinod Karki, head-strategy, ICICI Securities. 

Favourable policy action by two of the world’s most influential central banks —the US Federal Reserve and the European Central Bank —  has been the trigger for the gush of capital into risk assets, say analysts.

“The global liquidity is driven by the beginning of QE2 (quantitative easing 2) of $ 22 billion per month by the ECB from November and an increase in the Fed’s bond-buying programme to $60 billion a month,” says Karki.

In what could be positive news for equity market investors, global economists are forecasting global central banks to continue with their dovish stance into next year. 

“While the Fed is now on an extended pause, in our economists’ view, we expect global monetary policy to ease further, with the GDP-weighted policy rate marking a trough in March 2020,” says a note by Morgan Stanley. 

A substantial portion of the $6 billion flows in the past two months have been on account of chunky investments into specific companies that saw large share sales by investors. For instance, a large portion of the $700 million inflow witnessed on Thursday was to buy shares of Zee Entertainment from its promoters. Similarly, share sales in HDFC Life and SBI Life have helped garner large foreign flows.

Thanks to FPI preference for index heavyweights, such as HDFC Bank, HDFC, ICICI Bank, and Reliance Industries, the markets have been able to log new highs. The benchmark Sensex on Monday reached a new all-time closing high ending at 40,889; the Nifty ended at 12,074., just 14 points away from its previous record close made in June. 

The benchmark Nifty currently trades at 21.5 times its estimated earnings for 2019-20, two standard deviations above its long-term average. 

Some say the market setting has made it difficult for investors as strong overseas flows and reforms expectations are driving up valuations but earning growth continues to deteriorate because of the slowdown in the economy. 

“After the recent rally, the risk-reward for Indian equities appears evenly balanced. On the one hand, we expect a further deterioration in the growth environment to hurt corporate earnings, and on the other, equity valuations could remain elevated given risk-on sentiments globally and expectations of further reforms by the government ahead of the Union Budget in early February,” says Jitendra Gohil, head of India equity research, Credit Suisse Wealth Management.