FIIs again in love with Indian equities

After selling in January and early February, FIIs pump $1.1 billion in a fortnight, sending Sensex and Nifty to new highs

After a slow start, foreign institutional investors (FIIs) are back to bullish ways, pumping a little over a billion dollars into Indian equities in slightly over a fortnight.

After selling stocks through January and at the start of February, foreign investors, the largest non-promoter shareholders in the Indian market, have been net buyers of Indian equities for 15 straight trading sessions. Since February 12, they have invested nearly Rs 7,000 crore ($1.1 billion) into Indian stocks, helping benchmark Indian equities scale new peaks.

With the consistent buying, both the main exchanges’ benchmarks, the BSE Sensex and the National Stock Exchange’s Nifty ended Thursday their all-time highs. The Sensex topped its previous lifetime high of 21,483.74 on December 9 last year, to end at 21,525.14; the Nifty closed at 6,401, its all-time high on a closing basis.

Experts said FIIs are betting on improving macro economic prospects and a favourable outcome from the general elections in May. Easing of geopolitical tensions has helped improve sentiment of global investors, they add.

The macro picture of India has improved with the current account deficit narrowing and the fiscal deficit expected to stay in control with the government’s recent steps.

“In the vote-on-account, the government commendably desisted from populist measures (like farm loan waiver) in an election year, endorsing its commitment to fiscal consolidation,” said Abhay Laijawala, managing director and head of research at Deutsche Bank, in a client note. “Similarly, the latest diesel price hike announced on February 28 sends a strong signal that calibrated fuel price rationalisation will continue...With the continuing diesel price hike and the imminent model code of conduct, we do not expect any meaningful retreat in the government’s fiscal discipline.”

  A BNP Paribas Asia strategy report authored by Manishi Raychaudhuri, Gautam Mehta and Rajan Jain said better politics and improved earnings are leading to a more positive outlook for Indian equities. “In addition to increased prospects of a stable and pro-reform government, India’s earnings environment has also improved. BNP Paribas’ bottom-up Sensex earnings estimates and Factset consensus estimates have been upgraded two-three per cent over the past few months,” said the trio in a recent note. “The improved earnings environment, coupled with a better macro outlook, leads us to upgrade India to an overweight.”

Since the FII buying spree began in mid-February, the benchmark equities have rallied nearly six per cent. The rupee has also strengthened, from 62.21 to a dollar on February 11 to the current one of 61.11.

Foreign investors have also invested heavily in the debt market. So far in 2014, they have purchased fixed-income paper worth nearly $5 billion. Meanwhile, flows into equities so far this year are relatively muted at $820 million (Rs 4,850 crore).

In calendar year 2013, the Indian markets had seen FII inflows of nearly $20 billion (Rs 1.12 lakh crore). Analysts believe whether Indian markets will see flows as substantial as 2013 will largely depend on the election outcome.