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Amid the weakening dollar, Foreign Portfolio Investment (FPI) worldwide have seen attraction towards emerging economies like India, which are high on covid-led stimulus. While most Asian markets have witnessed outflows, foreign investors have turned to Indian equity as well as debt, with inflows touching all-time highs.
Despite the Covid-19 crisis and subsequent market slowdown, India received FPI worth $7.2 bn for the financial year 2021-22, within which $3 bn was net inflows only in September. This was the second-highest among all emerging markets after Brazil’s $9 billion.
The monthly report of the Indian finance ministry also cited that the country attracted a total Foreign Direct Investment (FDI) inflows of $27.37 bn during the first four months of FY 2021-22, highlighting positive global investor confidence. Meanwhile, India’s foreign exchange reserves stood at $638.65 bn, data as of September 27 showed.
This comes as Indian markets have been one of the best-performing markets worldwide this year. Indian stocks have received nearly $30 bn in YTD CY21, with benchmark Sensex rising more than 27% in the year so far after scaling new highs in September.
Along with a well-aligned secondary market, India has also ranked top among global peers in its initial public offerings (IPO) market, which swelled up to 25 this year and mega IPOs such as LIC, Paytm and Nykaa, that are expected to hit the markets in the coming months.
ICICI Direct Securities analysts are not only optimistic about the Indian equity market but also believe that the positive overseas investment trend will continue, going forward, as well.
Why are FPIs relentlessly mopping up Indian equities?
India has emerged as an attractive investment destination backed by attractive valuations and a relatively weak dollar. Confidence in the fundamentals of the Indian economy has ever more backed by the country recording positive third-quarter earnings. Other factors like improving Covid scenario, the increasing vaccinations rollouts and expectations of solid economic and earnings recovery ahead have led to foreign investors’ continuous interest in India’s potential.
Furthermore, India has been consistently introducing norms to attract overseas investment. The market regulator in June, the Securities and Exchange Board of India (SEBI), has also increased the foreign investment cap for individual mutual fund houses to $1 bn, from the earlier limit of $600 m. Now, India’s central bank, the Reserve Bank of India, has also allowed foreign portfolio investors (FPIs) to invest in debt securities issued by real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).
The country’s positive policy environment such as the push for privatisation, regulations on bad banks, launching of Production Linked Incentive (PLI) schemes and other reforms to kick-start economic growth and increase manufacturing are among the driving forces behind the high volume of Foreign Institutional Investors (FIIs) flows into India.
India’s rising number of unicorns has also paved the way for massive amounts of FPI inflows lately in the listed space. The country recorded its highest number of unicorns in a year in 2021, with as many as 33 start-ups that attained a unicorn status, as of October 2021.
Positive economic indicators on India’s recovery have aslo led to rising inflows of foreign investment through various routes, signifying an improvement in market sentiment. Even though India’s Q1FY22 GDP growth was marginally below forecasts, economists estimate a faster recovery in the coming quarters.
According to the IMF latest report, India, along with China, continues to remain one of the fastest-growing economies in the world, with growth projections of 9.5% in FY22 and 8.5% in FY23.
Outlook for Indian equities
Many analysts, however, suggest that India’s economic growth is still a bit uncertain, given the high valuations with India outperforming global peers in 2021 so far. Adding to that, the delta variant of the coronavirus still poses a threat to the economic recovery outlook on a global scale.
Nomura has downgraded Indian equities from ‘overweight’ to ‘neutral’, citing that there are headwinds emerging that could pose risks in the future. According to the Japanese firm, headwinds in India such as policy normalization amid sticky core inflation, elevated commodity prices, and tentative signs of a slowdown in consumption are worrying. UBS also reiterated its underweight rating on Indian equities, calling it ‘extremely expensive’.
US-investment bank Jefferies in a recent note said that it stays positive on the Indian economic activity picking up, but believed that market valuations do not leave much room for upside. It also estimated the total equity supply during FY22 to be about $30 bn, which requires FPI flows to pick up.
