On account of buzz for interest rate cut by most of the central banks globally, Indian stock market has been climbing to new highs since Friday last week. Nifty 50 index has been hitting new life-time highs for the last four sessions whereas BSE Sensex and Bank Nifty index has been touching record highs for the last three sessions.
Small-cap and mid-cap indices are also climbing to new highs on a regular basis. But, for surprise to stock market observers, foreign institutional investors (FIIs) have been buying heavily in the month of December. By 6th December 2023, FIIs have bought Indian shares worth over ₹8,800 crore in cash segment.
According to stock market experts, FIIs have changed their trade pattern in December because US treasury yield has come down from 5 per cent to near 4 per cent. US Fed has already dropped hint to start rate cut by March 2024, which means high interest rate regime has peaked out and hence US dollar has started sliding against major global currencies.
Market experts went on to add that attractive valuations of the Indian equity market and robust performance of the Indian economy is also doing the trick. They said that political stability after BJP’s win in three big states in Hindi hearland is also attracting FIIs towards Indian equity market.
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Speaking on the reason for FIIs’ trend reversal in their trade pattern, stock market experts listed out the following five reasons that has fueled FIIs’ inflows in Indian equities:
BJP’s victory in assembly elections
Pointing towards assembly elections results in five states, Omkar Kamtekar, Research Analyst at Bonanza Portfolio said, “The optimism among the FII community is underpinned by a series of recent events that have instilled confidence and comfort while investing in India. The first significant factor that has bolstered sentiment is the sweeping victory of the Bhartiya Janta Party (BJP) in the three state assembly elections. The triumph in these states has poured confidence in FIIs that the BJP would retain the General Election in 2024, thereby eliminating the political uncertainty that they were previously anxious about.”
Robust Indian economy
“The Q2FY24 GDP data was released on November 30th, which came in as a massive positive surprise of 7.6% beyond the expectation of RBI which pegged Q2FY24 growth at 6.5%. This outperformance was also supported by the improved high-frequency economic data such as GST collections being up by 11.9%, IIP growth at 5.8% and the CPI dropping to 4.9%. Indicating a sanguine outlook on the Indian economy in the near and medium term,” said Omkar Kamtekar.
Dip in US treasury yield
“The FIIs were short on emerging markets including India as the US bond yields were moving up. Now we have seen the bond yields falling from a peak of 5% and the markets showing strength with the recent election results. We are seeing a covering of shorts and also a reversal of the trend of FII selling which happened over the last few months. Considering the rise in markets, the short positions are mostly being covered and the upcoming year-end holidays, we can see some correction in the markets over the coming weeks,” said Divam Sharma, Founder and Fund Manager at Green Portfolio.
Attractive valuation
“Indian equities present attractive valuations compared to other emerging markets, making them appealing for investors seeking value. The weakening of the Indian rupee further enhances this appeal, as it allows foreign investors to purchase more Indian assets with the same amount of foreign currency. The monetary policy outlook, particularly the Reserve Bank of India’s expected slowdown in interest rate hikes, also plays a role by making equities more attractive than fixed-income assets,” said Sonam Srivastava, Founder and Fund Manager at Wright Research.
Rising weight of govt bonds in global indices
“Indian Government Bonds were recently included in the JPMorgan Government Bond Index and the weightage of India in the MSCI EM index has increased to 16.3% from 15.9%. Additionally, many FII investors have shifted MSCI EM ex-China wherein the weightage of Indian equities is 22.64% which necessitates a materially higher allocation. These events showcase that FII’s are incrementally increasing their allocation to the Indian Capital Markets to capture the India growth story and diversify,” said Omkar Kamtekar of Bonanza Portfolio.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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Reference Link:- https://www.livemint.com/market/stock-market-news/why-fiis-are-pumping-money-in-indian-stock-market-explained-with-5-reasons-11701919844279.html