FIIs Fuelling India’s Equity Surge

The adage of ‘sell in May and go away’ might not hold true this year for the Indian equity market. Historically, the month of May has not been very favourable for equity returns. However, this year we are witnessing the frontline equity index gaining around 1.2 per cent with the broader equity indices performing even better. One of the contributing factors to these gains is the increased activity of foreign institutional investors (FIIs) in the Indian equity market. In May, FIIs have been on a buying spree, purchasing domestic equity worth Rs 13,278 crore.[EasyDNNnews:PaidContentStart]

Notably, they have been net buyers every day this month, continuing their trend from March and April. Since October 2021, the Indian market had struggled to attract consistent FII investments. This was primarily due to the equity indices becoming expensive compared to their historical averages and relative to other emerging markets. Additionally, as interest rates rose in developed markets, FIIs sought out more favourable investment opportunities elsewhere. They shifted their money in search of greener pastures. However, the latest readings of retail inflation in both India and the US lead me to believe that we are approaching the peak of the interest rate cycle and a reversal in interest rates may be on the horizon.

The Reserve Bank of India (RBI) recently took a pause in its interest rate hikes and the May meeting of the US Federal Reserve indicated that the current tightening cycle is nearing its end, creating expectations for an upcoming pause in interest rates. Furthermore, an important data point suggesting that the US Federal Reserve is done with interest rate hikes is that in each of the previous eight interest rate cycles, the rate hikes stopped once the Federal Reserve funds rate exceeded the Consumer Price Index (CPI).

Presently, the Federal Reserve fund rate stands at 4.5-4.75 per cent while the CPI is at 4.9 per cent, very close to falling below the Federal Reserve fund rate. All of these factors contribute to positive market triggers for equities, particularly in emerging markets like India. In addition to the reasons stated above, there are other factors that make the Indian equity market attractive. Indian banks have largely remained immune to the challenges faced by banks in the US and Europe, which adds to the market’s appeal.

Furthermore, the latest Quarterly Results have been in line with expectations, thus drawing investors’ interest. Despite concerns of earnings downgrades surpassing earnings upgrades, there are more instances of earnings upgrades across sectors, except for IT and metals. Most sectors are performing well. Our cover story analyses the March-ending results in detail. One sector that has particularly outperformed in this result season is the automotive sector, including automotive ancillaries. As tyres play a significant role in the automotive sector, we have conducted an analysis of this specific sector and recommended two stocks that are likely to perform well in the future.

Additionally, we have an interesting story on ‘bonus issues’ by companies and whether they truly create wealth for investors. We encourage you to read it to gain a better understanding and make informed investment decisions. We expect that FIIs will continue purchasing domestic equity, creating buoyancy and strength in the equity market. Remember, the market has a reputation for swift movements, emphasising the importance of staying attentive. We will be back with more soon. Till then, stay invested!

RAJESH V PADODE
Managing Director & Editor

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