It's pouring foreign funds into India. Here's why

Mumbai: Foreign investors are pumping money into Indian equities with renewed vigour, as the weakening dollar — weighed down by near-zero interest rates in developed economies — has led to a wall of liquidity chasing risky emerging market (EM) assets.As US Federal Reserve chairman Jerome Powell signalled last week that low interest rates may be around for a while, overseas funds are mounting bets on stocks in India, ignoring grim economic realities and record-high share valuations.Since July 1, overseas investors have net bought Indian shares worth $7.5 billion — among the highest across EMs in this period. In August alone so far, these investors have purchased $6.35 billion — driving the Nifty and Sensex to six-month highs on Friday.“Inflows have come into EMs and some of it has come into India also,” said Sanjeev Prasad, co-head, Kotak Institutional Equities. “Dollar weakness has played a big role in these inflows.” A declining dollar is usually good news for emerging market stocks.This is because global funds pull money out of the US and increase allocation to high-yielding assets.The dollar index has fallen almost 11 per cent since March 20 — around the time the markets rebounded after a sharp month-long sell-off that sent international stocks into a tailspin — led by the US central bank’s decision to pump in record sums to deal with the fallout of the pandemic. 77843171A section of global market participants believes the dollar gush from the Fed will continue to put the US currency under pressure.Since then, Sensex and Nifty have jumped 50 per cent in a near-uninterrupted rally, recovering most of the losses since February 19. India’s retail and rich investors too have played a big role in market recovery, especially in the mid- and small-cap shares.“Indian markets are mirroring global markets and liquidity continues to be the key driver,” said Shiv Diwan, co-head, institutional equities, Edelweiss Securities. “In addition to foreign portfolio investment (FPI) buying, high net worth individuals (HNI) and retail activity have continued unabated.”While there are concerns that the markets may be overheated, most participants are unwilling to bet against the strength in the inflows.A study of foreign investors’ activity in equity derivatives shows they are most bullish on the Indian stock market in 31 months. The long-short ratio — a measure of bullish positions compared to bearish ones — on futures positions of FPIs touched 77.21 per cent on August 28, its highest reading since January 25, 2018, according to brokerage Motilal Oswal Securities.“Foreign inflows are building long positions in index futures because of lower volatility,” said Chandan Taparia, derivative analyst, Motilal Oswal Securities. The Volatility Index or VIX — a measure of near-term market risks — dipped to 13.3, its lowest since February 26. VIX had touched a decade high of 86.6 on March 24, a day after the Nifty fell to a four-year low of Rs 7,511.Despite uncertainties over the health of the Indian economy and fragilities of the banking system, many foreign investors are finding comfort in India because of growing foreign exchange reserves and relatively lower external debt. In the past, global crises of this magnitude, such as in 2012-13 and 2008-09, had caused instability in the rupee.However, some brokers said foreign investors remain ‘neutral’ on Indian equities.“Foreign investors haven’t been as gung-ho as the impression markets may give. A very large part of the flow in recent times would largely be towards the primary issues,” said Rajat Rajgarhia, chief executive, Motilal Oswal Securities. “These investors are waiting to actually see how India copes with this pandemic, macro data points and how companies recover.”Rajgarhia said foreigners are shuffling their portfolios within India, rather than committing any major fresh money.

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