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How FII inflows set the stage for record Sensex, Nifty rally this year

The strong buying activity by DIIs has helped market scale all-time highs this fiscal. But when it comes to Indian markets, contribution of FIIs cannot be ruled out.

Aseem Thapliyal        Last Updated: October 9, 2018  | 17:32 IST
How FII inflows set the stage for Sensex, Nifty record rally this year

The Sensex and Nifty have surged to record highs this year which led to a major rise in investor wealth during the last six months. In fact, market capitalisation of BSE-listed firms rose to an all-time high of Rs 158.89 lakh crore at the end of trade today.

The market capitalisation of BSE-listed firms rose by Rs 16.65 lakh crore or 11.71% since April 2018. At the end of March 2018, the figure stood at Rs 142.24 lakh crore.

Similarly, the Sensex and Nifty rose 13.80% and 11.90% during the last six months, respectively.  

Interestingly, domestic institutional investors (DIIs) have been net buyers in Indian markets since April. They invested Rs 44,845.49 crore into Indian equities. Since the beginning of this year, DIIs invested Rs 69,751 crore into Indian markets.

Domestic institutional investors are institutional investors which undertake investment in securities and other financial assets of the country they are based in. The investors usually comprise banks, mutual funds houses and insurance companies who pour in money expecting to reap huge returns from their investments.

The strong buying activity by DIIs helped market scale all-time highs this fiscal.

But when it comes to Indian markets, contribution of FIIs cannot be ruled out.

Foreign institutional investors are the institutional investors which undertake investment in securities and other financial assets of the country they are based out of.

In the first three months of this fiscal, FIIs withdrew Rs 61,130.37 crore from the Indian market primarily due to US-China trade war and hawkish commentary by the US Federal Reserve.

The trade war fears spooked global markets with analysts downgrading global growth estimates with the biggest downward revisions to growth in the US and China.

But the negative trend of FIIs fund outflows could not last for long, thanks to a host of factors.

VK Vijayakumar, chief investment strategist at Geojit said, "FIIs were apprehensive about the performance of emerging markets in general this year. In fact, the performance of most markets, with the exception of US, is mediocre. As on mid August, the EMU, Japan and EM indexes are down by 1.6 percent, 5.4 percent and 5.6 percent respectively in local currency. Out of the 27 major markets, only nine are in positive territory whereas 18 are in negative territory as on mid August. India is among the best performers and therefore FIIs have come back because it would be costly for them if they don't participate in this rally."

A major incentive for FIIs pumping money into the Indian market was healthy earnings show by India Inc in the first quarter of current fiscal.

The Q1 earnings show by India Inc was led by a better performance by firms in FMCG and information technology sectors, which logged double-digit growth in net sales and net profit. Earnings of banking and finance companies too logged double-digit growth, which improved sentiment on the Dalal Street.

India Inc witnessed a healthy 22 per cent revenue growth in the June quarter, according to a report by Icra.

An analysis of 173 companies showed consumer-oriented sectors such as auto, FMCG, consumer durables and airlines as well as commodity linked sectors such as cement, iron and steel and oil and gas, saw stronger sales growth in the June quarter.

Mustafa Nadeem, CEO at Epic Research said, "FIIs and DIIs have been positive since in fact June for the Indian market. The early signal for a medium-term bottom was change in derivatives rollover that we have seen for July series. It was above six-month average in a bear momentum that has seen a top of 11,150 and a sharp knife fall. The movement thereafter has been swift in Benchmark indices such as Nifty, Sensex or Nifty bank and IT for that perspective. The important point here is when we analyze Asian markets emerging economies; India is positioned well for fund inflows given the fact we have had few upgrades in the last one year.

On the earnings front, Q1 has been as per street expectations with leading stocks posting double-digit growth and are giving a positive guidance in the coming quarters. Monsoon rainfall has been going fairly well and is somewhat expected to be normal throughout the season.

All this does make India a sweet spot amongst the economies that are taking a hit from trade war."   

July and August saw FIIs re-impose faith in the Indian market. FIIs invested Rs 2,263.94 crore in July 2018 and Rs 7,331.81 crore in August. The investment came after three consecutive months of withdrawals by FIIs starting April 2018.   

Jaikishan Parmar, senior equity and research analyst at Angel Broking said, "The sell-off in the months leading up to June were driven by expectations that that the US Fed would get a lot more hawkish while the RBI would maintain a more neutral to dovish stance. However, the RBI has already hiked  rates on two occasions by 25 basis points each in the months of June and August. In the short term that does away with the risk of risk-off outflows from India and that explains why the tide tuned in the months of July and August. Also, the inflows in August were more because the RBI had front-ended the rate hikes and that was positive for the rupee value."

It's worth noting that of the 13.30% gains Sensex logged during the last six months, nearly 11% percent came during the last three months when FIIs turned positive for the Indian market.

Similarly, Nifty clocked 10% gains alone in the last three months when compared to 11.40% percent rise in the index in six months.

Harendra Kumar, MD at ELARA Capital said, "The FPI outflows in the first quarter is reflective of challenging global macros, due to which all emerging markets including India faced outflows. Concerns around trade wars, geo-political situation around Iraq, strengthening US dollar and elevated crude prices all contributed to flight of money to safety. More recently, micros in India have become more favourable with companies reporting strong earnings in Q1FY19. Outlook for earnings growth over the next three quarters is also strong providing a good foundation for equity flows to turn positive."

However, Vinod Karki, head, strategy at ICICI Securities said, "India FPI flows have been volatile throughout CY18  (In  Jan and March 2018, inflows were again positive at $3.5 bn and $1.2 bn respectively while for the rest of the months witnessed outflows). Inflows have been largely correlated with performance and the recent inflows could be correlated with the outperformance of Indian equities compared to other EMs since Jun'18 while the debt flows could be a result of the softening in latest print of CPI at a nine month low of 4.17% and the expectation that RBI will hold off a rate hike in October 2018 policy meet. So, we still believe that the FPI flows are volatile for now and would take it seriously once it sustains for a few more months."

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