Strong FPI flows and buoyant retail sentiment to keep bulls snorting

A trend reversal may happen if FPI flows turn negative; Nifty will need to fall below Mt 18,000 to go into serious downtrend

Indices across Indian equity markets have edged towards new record highs before undergoing a small correction in the past few sessions. The National Stock Exchange Nifty has gained 20 per cent in the past year; mid-caps (up 33 per cent), small-caps (up 31 per cent), and micro-caps (up 44 per cent) have done better.

Several factors have precipitated this rally.

A pause in interest-rate hikes by the Reserve Bank of India (RBI) has brought relief. There are signs of economic recovery continuing; although profit-after-tax growth rates have mellowed out, revenue growth continues to look strong. Most corporate guidance is optimistic. Inflation has moderated somewhat, mainly due to crude oil and gas prices tapering off in the past five to six months. The trade deficit, too, has narrowed.

But there are still fears aplenty.

The RBI governor has repeatedly warned about the central bank hiking rates again if inflation rises beyond acceptable levels. Also, the latest events in Russia may set off another spike in crude oil and gas prices over fears of supply interference, causing disruption as well as inflation.

In this fiscal year (2023–24, or FY24), institutional and retail attitudes have been positively aligned, although the data reveals some interesting trends.

Direct retail buying has been robust; the micro-cap and small-cap indices are driven by retail investors, with micro-caps, in particular, lacking any institutional support. However, mutual fund (MF) inflows into equity funds in April and May amount to only Rs 9,720 crore. That is well below normal, albeit positive.

Domestic institutions (excluding MFs) have done Rs 4,933 crore of net-equity buying in April-June (until June 23), and again, this is very low volume; in March 2023, for instance, domestic institutional investors (DIIs) bought for Rs 30,548 crore.

The big driver of the bull market has been foreign portfolio investor (FPI) inflows. After selling a net of Rs 37,632 crore in 2022–23, they have bought Rs 86,133 crore so far in FY24. There’s hope that this FPI enthusiasm will persist, given that the US Federal Reserve, too, has pressed pause on rates.

The global economy could see further stimulus from China, which is cutting policy rates and easing liquidity. Again, the Russia situation remains a wild card as far as geopolitics affecting markets are concerned.

Technically, the broad market-capitalisation indices are trading above their respective 200-day moving averages (DMAs), implying bullish long-term trends. 

However, the indices are mostly below their short-term moving average, such as the 20-DMA. This translates into a likely short-term correction.

There’s support for the Nifty at 18,575 (200-DMA levels) and again at 18,300. If that breaks, the next support is at about 18,000.

In May, Nifty Realty and Nifty Healthcare were the best performers. In the past year, the Nifty FMCG and the Nifty PSU Bank indices have been the best performers. 

Only the Nifty Media Index has suffered nominal losses in the past year. 

The Nifty Metal and the Nifty Auto have seen strong performances in the past month, as have the Nifty Consumer Durables. Valuations seem reasonable by historical levels, going by index private equities.

Given the positive institutional flows and strong retail sentiment, the bull run could continue after a short-term correction. But if FPI sentiment turns or DIIs become net-sellers, this could be challenged.

As of FY24, MF inflows are insufficient to balance heavy FPI selling if that occurs. The Nifty will need to fall below 18,000 to go into a serious intermediate downtrend.