Foreign flows relative to market size among lowest for India

Flows of more than 1% are considered to be healthy for market performance: Analysts

Foreign flows into the Indian market this year at $6.3 billion are one of the best among emerging markets on an absolute basis. 

However, relative to India’s market capitalisation (m-cap), these are less than peers Taiwan, South Korea or Indonesia. Year-to-date flows as a percentage of India’s m-cap of $1.97 trillion are only 0.32 per cent. The ratio for Taiwan and Turkey are respectively 0.67 per cent and 0.63 per cent. India’s foreign flows to m-cap ratio improved this year, though, from 0.19 per cent and 0.22 per cent in 2016 and 2015, respectively. 

Flows of more than one per cent are considered to be healthy for market performance, say analysts. The benchmark BSE Sensex fell in 2015 by five per cent; in 2016, it remained flat. In 2014, when the ratio was a healthy 1.04 per cent, markets had rallied 30 per cent. 

So far this year, key indices have rallied 12 per cent. If foreign flows continue at the current pace, the ratio could improve and so would market returns. However, to absorb huge flows without creating a valuation bubble, analysts say corporate earnings have to improve.