‘Pro-growth’ Budget, steady recovery bolster FPI inflows

Despite high valuations, foreign portfolio investors (FPIs) have turned bullish on Indian markets and pumped in a net Rs 22,038 crore in February so far, after the Union Budget presentation on February 1. Fund managers expect the FPI inflow to continue, with the economy on the recovery path and Covid infections subsiding.

Although stock prices skyrocketed, taking the Sensex up by over 11 per cent in ten sessions, foreign investors put Rs 20,593 crore into equities and Rs 1,445 crore in the debt segment, taking the total net investment to Rs 21,904 crore during February 1-12, according to the National Securities Depository (NSDL) data. They pulled out Rs 133 crore from hybrid schemes. FPIs were net investors to the tune of Rs 14,631 crore in January.

“We expect foreign flows to be positive in the fourth quarter as well in line with the trend so far as the Budget has been pro-growth with privatisation gaining ground,” said S Ranganathan, head of research, LKP Securities. Domestic institutions were sellers in the last couple of months. The last two months of 2020 saw FPI inflows of $8.5 billion. Domestic institutions have been large sellers for four months now. Last month, they sold $1.37 billion of stocks.

“India, with a recovering economy, is moving back to a higher nominal growth trajectory versus the western world (which continues to struggle with the second wave of Covid and related lockdowns) and looks as a credible destination for growth seeking developed world investors. This means strong FPI inflows can continue,” said Sorbh Gupta, fund manager—Equity, Quantum Mutual Fund.

With the system flush with liquidity, the Sensex has risen 11.36 per cent, or 5,258 points, to 51,544.30 since the presentation of the Budget earlier this month.

According to Ranganathan, several reforms aimed at protecting shareholder rights would improve the ease of doing business.

“FPIs have invested Rs 39,000 crore till date during CY2021 in Indian equities. Sectors like private banks, consumer, FMCG and IT have seen foreign flows as Indian companies have exhibited resilience and demonstrated growth post lifting of the lockdown restrictions in Q3,” he said. In fact, FPIs have been bullish on Indian stocks in the last two months. In calendar year 2020, FPIs invested Rs 1.70 lakh crore in stocks, taking the total investment to Rs 2.10 lakh crore since January 2020.

“FPIs now see India as having the fastest post-Covid recovery among emerging markets. The sharp and steady decline in Covid infections in India is a clear positive from FPI perspective and therefore, future flows also are likely to be good. There is a sectoral rotation happening in the market now,” VK Vijayakumar, chief investment strategist, Geojit Financial Services, said.

He added, “In 2020, the pharma sector was a preferred choice and the sector did very well while the banking stocks underperformed due to potential NPA concerns. Now, the banking stocks are again sought after by the FPIs. IT stocks continue to be favourites with high delivery buying.”

Investment bankers expect the Reserve Bank of India to buy up the FPI inflows that may step up in case of a greater-than-expected fiscal stimulus in the US.

“It will conservatively want to build forex reserves to buffer India from any future contagion from excessive liquidity and rising fiscal deficits. RBI Governor Shaktikanta Das has pointed out that ‘in order to mitigate global spillovers … (India has) no recourse but to build their own forex reserve buffers, even though at the cost of being included in currency manipulators…