₹46000 crore in August and counting: Why FIIs are net buyers in Indian equities despite continued rate hike by US Fed

Foreign portfolio investors (FPIs) turned net buyers in July for the first time in 2022, after 9 months of continued outflows. Since then the foreign investors remained enthusiastic about Indian equities in August as well. FPIs have infused a little over ₹46,000 crore in August so far amid softening of inflation in the US and the falling dollar index. This is the highest investment made by them so far in the current year.

Just in 3 weeks of August, the foreign investors have bought way more than in the entire month of July, which saw a net investment of nearly ₹5,000 crore, as per the NSDL data.

FPIs had been net sellers since October last year. Between October 2021 till June 2022, they sold a massive ₹2.46 lakh crore in the Indian equity markets.

Equity markets have also turned positive for the year 2022 on the back of sustained buying by FPIs. The earlier correction in the Indian markets provided investors with a good buying opportunity, experts noted.

In addition, FPIs poured a net amount of ₹1,679 crore into the debt market during the month under review.

According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services The main trigger for the sustained buying has been the steady fall in the dollar index from above 109 in end July to around 105 recently.

"FPIs turned net buyers in the Indian market in July and the buying momentum increased in August with steady buying through the exchanges. As per NSDL data FPIs have bought equity worth ₹40,770 crore this month as on August till 19th. But on the 19th the dollar index again moved up and crossed 107. If this trend continues capital inflows might be impacted. FPIs have been buyers in the debt market too with a net buy a figure of ₹2104 crore till 19th August," he said.

But usually, during the time when US Fed raises rates, foreign investors generally flock towards the developed markets. The US Fed raised interest rates by 75 bps each in June and July and now economists see another 50 bps rate hike in September in order to curb the rising inflation.

Despite the continued rate hikes and more potential ones going ahead, why the foreign investors have remained invested in India?

The turning point for the net flows in July was US Federal Reserve Chairman Jerome Powell's statement that currently the US is not in a recession helped improve sentiments and risk appetite globally.

US Fed commentary that the interest rate hike will not be very aggressive led to a positive sentiment across markets globally, noted experts.

Moreover, last month, Fed Chair Jerome Powell, due to speak at Jackson Hole next week, said "it likely will become appropriate to slow the pace of increases."

While the rate hikes are likely to continue, experts believe that it will not be very aggressive as the market had earlier envisioned. The bullish commentary by the US Fed, along with some moderation in inflation and a strong growth outlook of India has kept foreign investors invested in Indian equities. Further, the massive correction in the markets in 2022 before July has also made the valuations less expensive, giving a good opportunity for foreign investors to accumulate equities.

Outlook

Most experts believe that foreign fund inflow is expected to improve in the emerging markets on account of fading concerns of rising inflation and tightening of monetary policy by central banks. Optimism that lower crude oil prices will help dampen inflationary pressure and prompt the Reserve Bank of India (RBI) to go slow in raising interest rates also added to the bullish sentiment, they said.

Nishit Masters of Axis Securities believes that the trend of positive FII inflows will continue as long as the market believes that the US interest rate peak is not far away and there is no major negative news emerging from Europe.

However that said, considering the global uncertainties and geopolitical tension in Europe, it would be too early to predict the timeline for the recovery.

Going ahead, Vijayakumar believes the near-term trend in capital flows will be influenced mainly by the movement of the dollar.

"In emerging markets, India is likely to outperform with the best GDP growth this year and the next. So, India is likely to attract more capital flows compared to other emerging markets. However, the elevated valuations in India are a concern," stated Vijayakumar.

DIIs

While foreign investors have been infusing money, the domestic investors have been booking profit after the huge surge in July. Domestic Institutional Investors (DIIs) have been net sellers so far in August 2022 after being net buyers of the asset class for the previous 17 months.

Since the start of the month, DIIs have sold around ₹4,283 crore in Indian shares, after buying a net of more than ₹3.67 lakh crore between March 2021 and July 2022, National Stock Exchange (NSE) shows.

So far this year, they have bought shares worth nearly ₹2.37 lakh crore, helping partly offset the pain from an exodus by Foreign Institutional Investors (FIIs) as the US Federal Reserve started raising interest rates to cool inflation.

Prashanth Tapse, research analyst and Senior Vice President, Research, Mehta Equities said that the current selling shows DIIs are booking some profits, either of their own volition or due to redemption requests by investors, after being consistent buyers for the last 17 months.

"If the current momentum of FII inflows continues, then we expect the markets to remain strong. If for some reason, like higher-than-expected interest rate increases or a global slowdown, we witness a reversal in FII flows, then the markets should witness a correction. We expect the markets to take a breather after the recent swift upmove," Mehta added.