Analysts expect FII flows to Indian equities to pick up in H2

However, analysts do caution against intermittent phases of withdrawals by FIIs given macro-economic developments across major world economies

The worst may soon be over for foreign flows into domestic equities, observe analysts. They expect foreign investors to return to emerging markets, including India, as global central banks — especially the US Federal Reserve (Fed) — become less aggressive in hiking rates to rein in runaway inflation.

“Fed Chair Jerome Powell wants to slow down at some point after a 75-basis point (bp) hike on Wednesday. The Federal Open Market Committee may be thinking of a 50-bp (hike) in September, followed by 25 bps in the remaining two meetings,” wrote Philip Marey, senior US strategist at Rabobank International, in a recent note.

However, analysts caution against intermittent phases of withdrawals by foreign institutional investors (FIIs), given the macroeconomic developments across major world economies.

“We don’t believe the recent buying is driven by corporate results or valuation of Indian markets, but by events in the US. The narrative there is changing from inflation expectations to one of recession, which is driving hopes that the rate hike by the Fed and liquidity cuts will moderate. This will help US equities recover and aid recovery in Indian markets. If those happen, we can safely say the worst (in terms of market fall and FII sell-off) is behind us,” says Anil Sarin, chief investment officer, Centrum Portfolio Management Services.

After pulling out over $30 billion from Indian equity markets since October 2021, with geopolitical risks occupying centre stage amid rising commodity prices, fuelling inflation concerns, and ensuing tightening monetary policies of global central banks, the pace of FII outflow from Indian equity markets hobbled in July, as opposed to the previous months.

Meanwhile, markets here have seen a sharp drop, with the S&P BSE Sensex and the Nifty50 skidding 7 per cent each from their respective high levels logged in October 2021. The pain across most global indices has been acute, with the S&P 500 slipping into bear phase, with a fall of over 20 per cent during this period.

Recent relentless selling by foreign investors, according to analysts at Credit Suisse Wealth Management, has pushed foreign ownership of Indian stocks to a nine-year low of 19.4 per cent — below the 10-year average of 20.2 per cent.

According to Morgan Stanley, the biggest foreign portfolio investor (FPI) selling has happened in the technology sector. FPIs have gone underweight in the recently concluded quarter. They are also underweight on consumer discretionary and industrial, it says.

Mutual funds (MFs), on the other hand, have remained net-buyers of Indian equities for 16 consecutive months. As a result, MF ownership has reached a record high of 8.3 per cent and is significantly above the 10-year average of 5.7 per cent, suggest reports.

“The softening of the dollar index in the near term and the expectation of the Indian rupee to remain around or below the 80-mark vis-à-vis the US dollar will add to the positive sentiment. With global inflation progressively declining and central banks’ aggression on interest rate hikes abating, we anticipate FII inflows to gather steam over the next two quarters,” says Abhijit Bhave, chief executive officer, Fisdom Private Wealth.