After a selling spree, foreign institutional investors (FIIs) turned net buyers of Indian equities since March this year. An analysis by Bank of Baroda shows that India has registered FII inflow (equity) of $1,220 crore for the quarter ended 30 June.
Countries such as South Korea, Taiwan, and Indonesia have received far less inflows compared with India, and notably, the US and Thailand have seen foreign portfolio investors moving out of their respective countries, said the report.
A combination of factors seems to have helped India regain its lost charm amongst foreign investors. “Macroeconomic factors seem favorable for India with: (i) World-beating GDP growth forecast for FY24E, expected in the range of 6% to 6.5%, as per various rating agencies (ii) moderating inflation with May-23 CPI at 4.25%, lowest in 25 months due to softening commodity prices and easing supply chain pressures, (iii) peaking rates, with the current repo rate at 6.5% (paused in the last two RBI meets),” said a report by IDBI Capital Markets & Securities Ltd.
On the other hand, some developed economies are struggling with slower growth, elevated inflation, fears of a recession, and rate hike cycle by central banks. “Investors believe the post Covid-recovery in China has been a temporary one and the recovery has lost some momentum making the foreign investors jittery in terms of investing in China,” according to Bank of Baroda report. Countries such as India, Japan, and South Korea have made most of the gains compared with global counterparts, especially in equity markets, added the report.
While the mood on Dalal Street remains upbeat, there are some downside risks, such as lower-than-anticipated rainfall if El Nino were to play out. Also, the hawkish comments by some developed market central banks could translate into more interest rate hikes – a dampener for emerging market equities.
Further, in the case of India, valuations remain expensive. “Going forward, the market will focus on Q1FY24 earnings and management commentary. Nifty is trading at a price-to-earnings multiple of 20.99x on FY24E and 18.10x on FY25E earnings. With the recent market rally, we believe most investment stocks are trading at expensive valuations,” said analysts at Kotak Securities Ltd in a recent report.
