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Indian equity market will remain volatile over the next few months as investors await tangible data on macroeconomic and corporate recovery, says a Deutsche Bank report.
The market direction will also be determined by the ebb and flow of macro data from the US, which will impact the market's assessment of the onset, pace and quantum of the Federal Bank's lift-off on interest rates, it said.
The key stock market indices in India witnessed a sharp slide following forecast of deficient monsoon rains this year and a cautious stance by the Reserve Bank on growth as well as inflation.
The barometer index, the BSE Sensex, fell below the psychological 27,000 level last week, while the 50-unit NSE Nifty shed 318.95 points to settle at 8,114.70.
While foreign investors' sentiment on the Indian market's near-term prospects remained largely muted, the FII flows into Indian equities were only modestly negative by $67 million, belying fears of big capital outflows from Indian equities.
Indian debt however, bore the greater brunt of outflows as FIIs withdrew $1.3 billion from the Indian debt market - the first outflow since April 2014.
On a year-to-date basis, Indian equities have witnessed the net inflow of $7.1 billion, which is still among the highest in the emerging markets universe.
In contrast to FII sentiment, said the report, domestic institutional investors' (DII) net flows into equities have continued to stay positive despite the confluence of several headwinds over the past few months.
That underscores the hypothesis that India is in the midst of a multi-year shift in the nature of household savings from physical assets to financial assets, it added.
While domestic mutual funds have been net buyers now for past 13 months, importantly, DIIs ex-MF (largely insurance companies) have invested in Indian equities for a second month running and have continued to invest in the initial trading days of this month as well.
In May, DIIs ex-MFs net invested $690 million -- the highest monthly investment in the past 21 months.
In addition, the cumulative DII net investment in equities stands at $2.5 billion YtD, which is the first instance of positive flows since 2011.
Despite the volatile market, India was among the top-performing equity markets in May, the report said.
Breaking away from the streak of underperformance in the preceding three months, and contrary to the prevailing perception, Sensex impressively outperformed both MSCI Asia (by 480 bps) and MSCI EM (by 580 bps) last month.
Rising by 3% during the month, Sensex emerged among the top-performing equity markets globally, behind only Japan (5.3%) and China (3.8%), it added.
