After pulling out massive funds in March quarter, foreign investors pumped in nearly USD 4 billion in Indian equities in the three months ended June on attractive valuations, lifting of lockdown curbs and the government's efforts to kickstart economic activity, says a Morningstar report.
Besides, foreign portfolio investors' (FPIs) assets in Indian equities too surged after a sharp fall in the previous quarter. The value of their investments in Indian stocks climbed significantly during the quarter ended June 2020. This was largely on the back of robust net FPI inflows, coupled with a strong recovery in the country's equity markets.
As of the quarter ended June, the value of FPI investments in Indian equities stood at around USD 344 billion, which is considerably higher than the USD 281 billion registered in the preceding quarter, a spike of almost 23 per cent. "During the quarter ended June, FPIs were net buyers in the Indian equity markets to the tune of USD 3.91 billion, which was in sharp contrast to the net outflow of USD 6.38 billion recorded in the previous quarter," according to the Morningstar report.
FPIs started the quarter on a sombre note as they were net sellers to the tune of USD 903 million in April. They made a comeback in the subsequent months of May and June as they pumped net assets worth USD 1.93 billion and USD 2.89 billion, respectively, into the Indian equity markets.
After an exodus of foreign investments to the tune of USD 8.4 billion in the month of March, the net flows stabilised somewhat in April. Although such investors continued with their cautious stance and were net sellers through the month, the amount of net outflow came down significantly.
"What contained the pace of net outflow were the measures announced by the government and the RBI periodically to revitalise the sagging economy -- and India performed better in containing the aggressive spread of COVID-19," the report read. FPIs, however, turned net buyers in the Indian equity markets from the month of May.
This could be attributed to the attractive valuation of the Indian equities after the sharp correction during the first quarter of calendar year 2020 and significant depreciation of the Indian rupee against USD, which provided them a rather good entry point. "Furthermore, the lifting of lockdown curbs and the government's efforts to kickstart economic activity in the country also garnered positive response from foreign investors," it added.
It further said that certain technical factors also helped in sustaining the FPIs' interest in the Indian equity markets. For instance, the rights issue of Reliance Industries, which was oversubscribed, and a stake sale of 2.8 per cent stake by Uday Kotak in Kotak Bank also attracted significant foreign flows. Morningstar said the escalation of tension between India and China at the border did hit sentiments hard, which led to FPIs pulling investments out of Indian equities intermittently.
However, the scenario improved later on expectations that the series of discussions between the two countries to diffuse the tension would yield positive results. Since then, FPIs have continued to invest in the Indian equities and have substantially increased the quantum of investments in recent times.
From July till August 13, overseas investors are net buyers in domestic equities to the tune of USD 4.44 billion. With this, FPIs flow into Indian equities turned positive for the calendar year 2020, after hovering in the negative territory for a long time. This could be largely attributed to the excess liquidity available in the global economy, especially with the US Fed printing money on a continuous basis, with a portion of it making its way into the Indian markets and, probably, other markets as well, the report said.
The report pointed out that sustainability of such a huge quantum of net inflows by FPIs in Indian equities is hard to ascertain at the moment as there are several concerns looming large. Further, increasing tension between the US and China, surge in coronavirus cases globally and a sharp increase of case count in India with the economy still limping may act as deterrents for foreign investors, the report read.
Moreover, as the liquidity in the global market dries with normalcy restored, the flows could get rationalised or may even head back, it added.