Foreign portfolio investors rekindle love affair with Indian markets

A year after applying brakes on their investments in India, foreign portfolio investors (FPIs) are once again looking at the country aggressively. So far in 2019, India has been one of the highest recipients of foreign flows among Asian and Emerging Market (EM) economies. Last year, flows into India were tepid as most FPIs had cut their ‘overweight’ stance on India to multi-year lows. However, hopes of improvement in macro conditions and earnings growth have prompted foreign funds to mount aggressive bets on the country.

So far this year, India has garnered $7 billion of FPI flows, much higher than peers such as South Korea, Taiwan and Indonesia.   The surge in flow comes amid influential foreign brokerages such as Goldman Sachs and BNP Paribas upgrading their stance on India.

BNP Paribas upgraded Indian markets to ‘overweight’, citing stability in corporate-profit growth and calling the bank asset-quality problem “a thing of the past”. Meanwhile, Goldman Sachs cited “better December quarter earnings and a pick-up in FII positioning from lows” for its upbeat stance.

 

Some experts, however, say the liquidity surge has less to do with fundamentals and more to do with central bank action.

“There is currently a risk-on trade in favour of emerging markets and India has been a beneficiary of that. India is emerging as one of the more attractive emerging markets where investors can generate good returns on the back of a stable currency, low inflation and a suite of well-managed companies,” said U R Bhat, director, Dalton Capital India.

The US Federal Reserve’s dovish stance and expectations of other global central banks following the suit have led to increased liquidity in the system, propelling markets across the globe.

Despite the recent surge in flows, FPI investment on a one-year basis into Indian markets are just $356 million.

“As against a lull seen over the past year, FPI flows turned sharply positive in February and gathered further momentum into March,” said Ravi Muthukrishnan, head of research, Elara Capital. “In our view, strong FPI flows will sustain on the back of a pause in the US Fed rate hikes, which has the effect of weakening the Dollar index and channelising flows into EM, and attractiveness of India relative to other EM in a challenging global growth environment — India, which is a consumption-driven economy, is well placed unlike other EM which are exporters to China where growth concerns remain.”