Markets log 3rd highest monthly FPI inflows since Covid outbreak in August

Foreign investors pump in Rs 51,000 cr; near-term flows to hinge on rupee, bond movements

In August, domestic equity markets garnered one of the highest foreign portfolio investor (FPI) flows since the outbreak of the pandemic in 2020, despite the US Federal Reserve standing firm on unwinding its stimulus measures to control inflation.

FPIs pumped in over Rs 51,000 crore ($6.4 billion) in August, the most since December 2020 and the third-highest tally since March 2020—the month the Covid-19 pandemic roiled global markets. This was the second consecutive month of positive foreign flows. In the preceding nine months, FPIs had yanked out over $32 billion or Rs 2.2 trillion.

The reversal in FPI flows since June-end has helped the domestic markets rebound 16 per cent from their June lows.

Indian equities were among the biggest recipients of overseas flows in August, shows Bloomberg data.

“India stands out as the only country where there is positive momentum in terms of growth and economic activity compared to other emerging markets. There are many funds eager to invest in markets where there is good economic growth. India is one such market. FPIs have taken money out continuously since September 2021. Now with economic growth visible, they are trying to plough back some of it,” said UR Bhat, co-founder, of Alphaniti Fintech.

On a year-to-date basis, commodity-exporting nations such as Indonesia and Brazil have seen higher FPI inflows and better performance. India, however, has been catching up fast over the past two months by clocking returns higher than any other major global market. India has outperformed the MSCI Emerging Market index by almost 19 per cent since mid-June thanks to improved FPI inflows.

“One felt that once the dust settles on interest rate hikes, everyone will look at growth and India will emerge as the place to be. It played out a little earlier than one expected. One is not sure of what the catalyst is going to be to get more flow. If the energy crisis in Europe is resolved, that will make things a little less worrisome,” said Andrew Holland, chief executive officer, of Avendus Capital Alternate Strategies.

India’s recent outperformance has been underpinned by improved outlook for foreign flows. However, it remains to be seen if strong flows into India will continue as the US Fed has embarked upon a quantitative tightening programme. Under this, the US central bank will reduce its balance sheet by around $90 billion a month. This is a sharp reversal in its stance as it had expanded the balance sheet by $120 billion a month since June 2020 to help revive the economy battered by the pandemic.

Also, the recent outperformance has widened India’s premium to the other EMs. The Nifty now trades at 22.2 times its estimated 12-month forward earnings. In comparison, the MSCI EM index trades nearly half of this at 11 times.

In the past, whenever the Indian market has traded at such a hefty premium, the domestic markets have underperformed other emerging market peers. Another potential headwind for FPI flows could be the weakening rupee against the US dollar. The rupee has tested a new low against the dollar ending at 79.97 on Monday. A depreciating rupee eats into the returns of overseas investors.

Analysts also emphasise that the FPI flows into EMs, including India, would hinge on the performance of the US treasury. On Tuesday, the 10-year US treasury hit 3.1 per cent. It was at 2.57 per cent at the beginning of the month. Further hardening of yields could pose a danger for FPI flows as attractive yield in the US could prompt foreign funds to reassess their risk-reward ratio.