Why Are FIIs Flooding Dalal Street with Dollars?

Kotak Insights | 21/07/2023

While rains cast shadow on many states, Indian markets bask in a sunny morning.

The Sensex is close to hitting the 67,000 mark for the first time. And the Nifty teases the 20,000 level.

These milestones mark significant achievements in the history of Indian share markets, and if you’re curious to know the reason behind the surge, the answer lies in the Foreign Institutional Investor (FII) data.

India received the highest inflows among developing countries as FIIs poured in more than $16 billion in Indian equities for the first 16 weeks of FY24. This was not the case sometime back.

FIIs were net sellers for the past two years. But now they’ve taken a massive U-turn. Their Indian equity investments have soared since March 2023.

The FII inflows for July are even more impressive, with net buying nearing the Rs 167 billion mark within the first couple of weeks.

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This influx of investment has boosted market sentiments.

Things are looking way better than they were. And given how bullish the markets are, there could be more gains for the taking.

But why, all of a sudden, have FIIs returned to India?

The sudden change of heart is because of the newfound signs of stability across a few important parameters.

One of the reasons is the weakening of the U.S. dollar. The Dollar index recently slipped below $100, a level last seen in April 2022.

This decline has positively affected the Indian rupee, causing it to appreciate against the dollar.

And what happens when the rupee strengthens? FIIs return to India as they ditch the riskier US dollar for now.

The second reason could be the China plus one megatrend playing out in India.

The megatrend, characterized by multinational companies diversifying away from China, has further piqued foreign investors' interest. Geopolitical tensions and increased sanctions against Chinese industries have accelerated this shift.

Moreover, India's proactive measures, including simplified FDI policies and a single-window clearance mechanism for FIIs, have bolstered investor confidence.

After going through the geopolitical tensions, high inflation, high-interest rate regime and the global banking crisis, India has emerged stronger than ever. The country’s economy has grown much faster than other countries that have reported either a slowdown in their gross domestic product (GDP) growth or a negative number.

And then there’s private capex, which has only increased in the past year. Corporate earnings are also in-line or above estimates, further deepening the bullish sentiment.

Let’s see where the monies are flowing…

Key Sectors in Focus

Most of the funds that FIIs invest in Indian equities flow to finance and banking stocks.

Foreign investors were bearish on financial entities in the first few months 2023. But soon after these companies posted their Q4 and FY23 numbers, the growth in net interest margins was evident on the back of strong credit growth.

Multiple private and public sector banks posted record numbers for FY23.

Experts predict that banks are on the cusp of a multi-year credit cycle, and the strong growth momentum will continue at least for the first couple of quarters of FY24.

Click here to check our customised screener and know which banking stocks FIIs have bought recently.

Capital goods sector also found favour from FIIs. The inflows in the capital goods sector now stand at a 2-year high, all thanks to the good run in Indian defence stocks.

The auto sector also witnessed decent inflows. The sector is on the cusp of a multi-year bullish cycle as everything falls into place. Raw material prices have started easing while semiconductor chip shortage issues are fading.

FII buying in IT stocks crossed the $10 billion mark in FY24 as IT stocks found their long-lost charm and staged a decent recovery since TCS and HCL Tech results were out.

Going forward, though, please note that things could take a U-turn for the worse as valuations of many stocks remain high at the moment.

For the time being, the government’s push for reforms and improvement in ease of doing business has laid a strong foundation that would help bolster the Indian economy.

India currently boasts low single-digit inflation rates, whereas other countries are still grappling with many issues apart from inflation.

FII inflows and outflows will be a hot topic that people discuss at dinner parties in the coming time. But one thing is certain - all the above factors tell us that Indian stocks are worth holding and FIIs are listening.

Hopefully, this helps you think more critically about the markets and how to plan your investments.

For a more thorough currency outlook, tune into the Currently in Currency Podcast where Anindya Banerjee discusses the dollar, rupee, and other currency setups every morning.

We’ll be back with another exciting story next week.

Until then - Happy Investing!

Sources: Kotak Securities, BSE, NSE, Economic Times