Raising bets: FPI buying in Indian shares at nine-month high in May

Net buyers of equities worth Rs 37,317 crore in May, highest since Aug 2022

Improved global-risk sentiment, encouraging corporate results, and positive macro indicators have led to the best buying by foreign portfolio investors (FPI) in nine months. This month, FPIs have been net buyers of equities worth Rs 37,317 crore, the highest since August last year.

FPIs were net sellers for the first two months of this year but turned buyers in March amid moderating valuations. The Indian markets corrected nearly 10 per cent between December and March. Buying continued amid hopes that rate hikes by the US Federal Reserve had peaked.

“FPIs want to cash in on valuation comfort before everyone was convinced that rate hikes are peaking,” said G Chokkalingam, founder of Equinomics.

What further boosted sentiment is inflation in India dropping within the comfort zone of the Reserve Bank of India, in line with corporate earnings and positive macroeconomic data underlined by robust goods and services tax (GST) collection and the purchasing managers’ index (PMI) numbers.

Fears of a contagion due to the banking crisis in the developed world also eased as the regulators in the respective countries stepped in to contain the situation. Sharp FPI inflows into the market have helped Indian equity benchmarks to post one of the better returns among the country’s major global peers though they lagged behind some.

The Sensex gained 2.3 per cent and the Nifty 2.4 per cent in May. Japan’s Nikkei, Taiwan’s TAIEX, Brazil’s IBOVESPA NASDAQ Composite, and South Korea’s KOSPI index have given similar or better returns than India. But most others have underperformed the Indian indices and have given negative returns.

“South Korea is one of the better-performing markets in Asia this year because of export potential with China reopening. FPI flows could go more into exporting countries in anticipation of a pickup in global growth,” said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

The gains have also led to a rise in valuations. The Nifty is trading at a trailing 12-month (TTM) valuation of 22.4 and the Sensex at 23.18. Both indices are back to their 10-year average valuations. A rise in valuations could hamper fresh flows into India. There is also fear that FPI flows go more into exporting countries once rate hikes peak in anticipation of a pickup in global growth.

“We would get flows but bigger flows will come after October. By that time, the earnings forecasts will be better. We are going to get flows only because of our weighting. We may get an underweight position because of the valuations,” said Holland.