Foreign Portfolio Investors (FPIs) are softening their cautious stance on the Indian equities market, becoming net buyers in the last two sessions, since Finance Minister Nirmala Sitharaman on Friday announced a cut in corporate tax rate. This comes after three months of aggressive selling by FPIs in the Indian equities market.
On Monday, FPIs invested Rs 11,058 crore and withdrew Rs 8,373 crore, a net buy of Rs 2,684 crore, outpacing domestic institutional investors (DIIs), which were net buyers to the tune of Rs 291 crore only.
FPIs had invested Rs 17,032 crore on Friday and withdrew Rs 16,996 crore, a net buy of Rs 36 crore. "The series of measures the government has taken gives a lot of confidence to investors. The second leg of the rally for markets will come when FPIs start tilting towards India," says G Chokkalingam, founder and MD, Equinomics Research and Advisory.
The market is already 8 per cent in the last few days, when FPIs almost missed the bus. "They may be waiting on the sidelines and will come back. The removal of surcharge and the government's intent to compromise on fiscal deficit over growth is a positive for investors," he added.
Since the budget announcement in July, FPIs had maintained a cautious stance on the Indian equities market, until Friday's record rally, which witnessed the biggest intraday gain ever.
"They (FPIs) are global funds allocating money to India as part of their emerging market portfolio. India, like other emerging markets, is considered riskier than developed markets and FPIs have to take a call whether it is worth taking higher risk at this point of time. That is why they have been careful," says UR Bhat, Fund Manager, Dalton Capital Advisors.
On Friday, domestic institutional investors (DIIs) were net buyers to the tune of Rs 3,001 crore. Trade tensions between the US and China besides Iran have led to a FPIs having a cautious stance towards India. "They would want to conserve capital when uncertainty is rising on trade and oil front," he added.
"FPIs are negative on the emerging markets as a whole and that is not giving them the conviction to buy in India, resulting in an outflow," says Chokkalingam.
FPIs have withdrawn nearly Rs 33,700 crore from the secondary equity market since the beginning of July 2019 till September 12, but it has been more than made up by fresh investment by DIIs, who have been net buyers to the tune of around Rs 43,800 crore in the last three months, outpacing the sell-off by during the period.
Sitharaman on Friday announced a cut in basic corporate tax rate to 22 per cent from 30 per cent while for new manufacturing companies it is down to 15 per cent from 25 per cent. The move is expected to give a fillip to earnings of companies besides creating investment demand in the next six months.
Bhat believes FPIs will jump in to the market more aggressively when valuations become more realistic as NIFTY 50 companies, which are or primary interest to FPIs, are currently overvalued. "In India, companies worth investing in continue to be very expensive and valuations are high. So even if the sentiment has improved, they are not cheap. FPIs will not rush suddenly due to change in tax rates," he adds.