In what may seem as a surprise towards the end of a year marked by heightened volatility and all-time highs for the Indian indices, foreign institutional investors (FIIs) have turned net buyers in November till date after logging the worst monthly outflows in October .
Foreign investors which withdrew Rs 38,906 crore (equity funds plus debt funds plus hybrid funds) from Indian markets in October attracted by better returns in the US spurred by rising bond yields infused Rs 10,523 crore (equity funds plus debt funds plus hybrid funds) into the Indian market till date this month. So far, January has been the best month in terms of FII investments as they infused Rs 22,272 crore into Indian markets.
FIIs have been on a withdrawing spree in September and October on the back of US providing more attractive options for investing. In September, they pulled out Rs 21,035 crore from the Indian capital market. In July and August, FIIs infused funds to the tune of Rs 2,264 crore and Rs 5,146 crore, respectively.
Foreign institutional investors are the institutional investors which undertake investment in securities and other financial assets of the country they are based out of.
The U-turn by FIIs can be attributed to rising bond yields in the US and weakening emerging market currencies among other factors.
Himanshu Srivastava, senior analyst manager research at Morningstar Investment Adviser India attributed the latest inflow to fall in crude prices, recovery in rupee against the dollar and improvement in the liquidity situation.
Crude oil prices have fallen 28.46% from their four-year highs of $86.27 per barrel in early October when the markets braced for US sanctions on Iran. Yesterday, brent crude hit a one-year low of $61.71 per barrel in international markets.
India relies more than 80 per cent on imports to meet its oil needs. With a fall in crude oil prices, cost of imports decline leading to narrowing of the current account deficit (CAD). A lesser CAD will lead to a surge in the value of rupee and the stock markets since shares of companies using oil in various stages of production will rise due to a fall in input costs and higher profits for these companies.
VK Vijayakumar, chief Investment strategist at Geojit said, "Since India was impacted by the surge in crude which took the Brent to $86.7 per barrel in October, the rupee came under severe pressure in the currency market taking the currency to 74.40 to the dollar. This aggravated FII selling.
Now the tide has turned with the crash in crude. Crude crashed by 7 percent within a matter of hours on November 13. It is important to appreciate the fact that crude in no longer just a commodity; it is an asset class in which billions are invested and traded every day. That's why we have sharp and surprising ups and downs in crude during such short intervals. Also, the 10-year yield has softened to below 3.1 percent. This has arrested capital outflows.
With the crash in crude, India's CAD will not go into dangerous territory as the market feared earlier. Hence, the INR has appreciated by a good margin to below 72 from 74.40 levels. FIIs stopped selling and have turned buyers now due to this strength in INR. Also, there is optimism in the market that the robust mutual fund inflows (above Rs 35,000 crore in October) will prevent a major slide in the market. Another positive factor is the mild pick up in corporate profitability in Q2."
The Indian currency closed 21 paise higher at 71.46 level yesterday to the US dollar on increased selling of the greenback by exporters amid softening crude oil prices, and persistent foreign fund inflows.
It has recovered 3.95% since the currency hit its all-time low of 74.48 on October 11 this year.
A rise in Indian currency leads to more FII inflows into the Indian market. A depreciating rupee leads to erosion of value of their holdings in dollar terms.
Interestingly, domestic institutional investors (DIIs) who were the saviours of the Indian market this year, when FIIs were searching better avenues for higher returns, have turned net sellers in November.
Rahul Agarwal, Director at Wealth Discovery/ EZ Wealth said, "In November DIIs have withdrawn far larger amount compared to October. The investment pattern of DII's and FII's has been diametrically opposite throughout 2018. While FIIs have been net sellers in almost every month in 2018, DIIs have been net buyers throughout the year. It can be said without reservations that DIIs have been largely responsible for the resilience of the Indian stock market as FIIs outflows have been backed up more than adequately by DIIs inflows. DIIs infused a total of Rs 26,000 crore in October whereas they have turned net sellers albeit marginally for the month of November. One possible reason for this selling can be profit booking in select names as the markets have rebounded fiercely from their October lows.
Mustafa Nadeem, CEO at Epic Research said, "For November, FIIs have been net buyers in equities to the tune of Rs 4,500 crore whereas DIIs have been net sellers of Rs 1,800 crore worth equities. The withdrawal by DIIs can be attributed to churning of portfolio or redemptions since we'll have data by month end. If we look at the current phase of the markets, midcap and small caps have performed worst, down by 40%. So possibility of redemption or liquidity cannot be denied. Total assets managed by Indian MF Industry have fallen from Rs 24.70 lakh crore in August 2018 to Rs 23.15 lakh crore in October 2018. 60% of the total money is held in equity-oriented schemes which of course have taken a beating since January 2018.