Foreign investors turn bullish on primary market

The past financial year was lacklustre for the primary equity market, but there are signs of a revival in FY16.

There has been a strong rebound in the net investment by foreign institutional investors (FIIs) in the primary market, with sequential and year-on-year growth in the last three quarters of FY15.

For instance, FIIs invested $1.2 billion in the primary market in the fourth quarter, almost five times their investment in the corresponding quarter of FY14.

A stable to rising rupee is aiding the trend, besides India's improving growth outlook. There seems to be a negative correlation between net inflows in the primary market and the rupee-dollar exchange rate (see charts below).

The correlation co-efficient is -0.24, which means every 100-basis-point (one per cent) rise in the rupee-dollar exchange rate (appreciation) leads to a 25-basis-point rise in FII inflows in the primary equity market. This should not be surprising; a rise in the value of the rupee allows FIIs to buy more dollars for every rupee when they repatriate their profits from India.