FPI inflow crosses $30 bn in FY21, highest investment in a FY since 2013

Thus far in FY21, BSE, NSE have rallied 70 per cent and 71 per cent, respectively.

Foreign portfolio investors (FPIs) continue to bet big on ‘India story’ with their net investment in Indian equities already hitting $31.7 billion mark thus far in financial year 2020-21 (FY21) – the highest investment in a financial year since fiscal 2012-13 (FY13) when they had invested a net $25.8 billion (Rs 1.40 trillion) in Indian equities, data show.

After remaining on the sidelines during the last week, FPIs have pumped in over $1 billion (Rs 8,030 crore) in equities in past two days alone, after Finance Minister Nirmala Sitharaman presented Budget proposals for FY22.

On Tuesday, February 2, they put in an additional $847 million (Rs 6,182 crore) as per stock exchanges’ provisional data.

“Foreign investors have been steady buyers of Indian equities since the Nifty50 was around the 10,700 levels.

"The overall improvement in the Indian economy has made them realise that this is not a flash in the pan. Budget 2021 proposals have reinforced their positive stance on India.

"Plus, there is ample liquidity globally that has found its way into emerging markets, including India,” explains U R Bhat, managing director at Dalton Capital.

According to Morgan Stanley's estimates, last week saw an all-time high US dollar inflow amount to dedicated Asia / EM equity funds of $8.7 billion, marking the 18th straight inflow week to the asset class.

“Euphoric fund inflow (outflow) episodes have invariably been associated with market tops (troughs) throughout MSCI EM's volatile history,” said Jonathan F Garner, chief Asia and emerging market strategist at Morgan Stanley in a February 2 co-authored report.

The strong inflow in equities has seen the Bombay Stock Exchange (BSE) 30-stock index, S&P BSE Sensex, and the National Stock Exchange (NSE) Nifty50 index hit their respective record highs in intra-day deals on Wednesday.

Thus far in FY21, these indices have rallied 70 per cent and 71 per cent, respectively.

Key risk

The key risk to foreign flows, according to experts, remains the a change in policy stance of global central banks, especially the US Federal Reserve (US Fed) over the next few months, which they believe can alter the fund flow into EMs, including India.

“It remains to be seen how the US Fed will react over the next few months.

"There still is the much-talked about $1.9 trillion stimulus package in US and the global markets are looking forward to. There can be a reversal in flows if the interest rates were to rise in the US. Right now, the possibility of this happening is remote,” adds Bhat of Dalton.

That said, most analysts remain bullish on the road ahead for Indian equities, but caution against the sharp run up seen since March 2020 low that have made valuations expensive in the backdrop of growth in corporate earnings not keeping pace with the market rally.

“From the perspective of the equity markets, the budget is a positive, as it helps improve the narrative on growth. To that extent, the risk to current earnings expectations reduces.

"However, we note the corporate earnings growth are estimated at a robust 21 per cent CAGR over FY20-23F, compared to 5 per cent over FY15-20.

"Our key concern remains inflationary pressure and its impact on Ebitda margin. We remain selective on Indian equities.

"Our Nifty target is 14,680 based on 19.5x FY23 consensus earnings,” says Saion Mukherjee, India Equity Strategist at Nomura.

Photograph: Gary Cameron/Reuters