FII flow into Indian equities likely to moderate in FY22: Analysts

Besides India, experts say given the robust broad-based economic recovery, FIIs/FPIs can look towards China. Other emerging markets, they say, are yet to recover from the pandemic-induced sluggishness

After a blockbuster financial year when the foreign flows – considered the movers & shakers of the stock market – into Indian equities hit a seven-year high, the pace of investment could moderate as overseas investors reassess their investment strategy, say analysts. Emerging markets (EMs), including India, they believe, will play second fiddle to the developed market (DM) peers in the short-to-medium term. In the first half of the current fiscal 2021-22 (FY22), rising US yields can take the charm off the EMs, but as US inflation and yields moderate, flows to EMs will pick up.

“Global economic recovery, especially in the DMs, has been stronger-than-expected. Among key variables, foreign investors will keep a tab on how interest rates, US dollar movement, bond yields and the inflation scenario plays out. As such, they will prefer DMs over EMs – at least in the short-term – where the pace of economic recovery is also good. Hence, flows into EMs, including India, will get tempered on a relative basis compared to FY21,” says Vaibhav Sanghavi, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies.

Most emerging markets (EMs) witnessed healthy flows for most part of FY21 as global central banks, especially the US Federal Reserve (US Fed), remained ‘accommodative’ and pushed liquidity to help revive economic growth. In this backdrop, foreign portfolio investors (FPI) invested across geographies and asset classes. India, too, got its share with FPIs investing a record Rs 2.74 trillion ($37 billion) during FY21 in the Indian markets – the most since FY13, when they had pumped in Rs 1.4 trillion ($25.8 billion), data show. 

The S&P BSE Sensex and Nifty50 logged their best financial year performance in a decade and surged 68 per cent and 71 per cent, respectively in FY21. Earlier during FY10, the S&P BSE Sensex had surged 80.5 per cent, while Nifty50 rallied 73.7 per cent. 

Foreign holding in the Indian equity market has shot up to 27.6 per cent, much above the long-term average of 19.6 per cent, a Nomura report said. FII’s increased their holding in metals, cement, coal/utilities, consumer durables and industrial sectors in the last few months, while cutting their position in media and real estate sectors.

Rising Covid cases

Going ahead, another key concern for investors are the rapidly rising Covid cases and the sporadic lockdowns and mobility curbs in key Indian economic hubs. This, experts say, can dent corporate profitability and push the full-fledged economic recovery even further ahead into 2021. 

Taking cognizance of the development, foreign investors have already been on a back foot and withdrawn Rs 1,348 crore from the Indian equity markets in the first nine trading sessions of April, data show. The S&P BSE Sensex and the Nifty50 have slipped around 4 per cent and 3 per cent, respectively as a result during this period.

“The sharp escalation in the number of confirmed and active Covid cases across several states in India may result in further lockdowns in more cities and states. However, the ongoing vaccination rollout and ‘lagged’ recovery data would suggest moderate economic and earnings impact. Nonetheless, the news will be pretty grim over the next few weeks and may force a recalibration of the market’s hitherto sanguine view of the pandemic, economy, earnings and valuations,” cautions Sanjeev Prasad, co-head, Kotak Institutional Equities.

Besides India, experts say given the robust broad-based economic recovery, FIIs/FPIs can look towards China. Other emerging markets, they believe, are yet to recover from the pandemic-induced sluggishness.

“We feel currently given the macros, China and India are better placed than other EMs to endure US market’s volatility. Hence, as of now our choice remains India and China among the EMs. Combining financial, macroeconomic and political stability India is a better option for the FPIs/FIIs to generate positive carry trade. Sectors that have high correlation with economic recovery will be a preferable destination for their flows,” said Nischal Maheshwari, chief executive officer for institutional equities at Centrum Broking.