Indian Markets Reflect FII Charm

After withdrawing billions of dollars from Indian equities year-to-date, foreign institutional investors (FIIs) have made a remarkable comeback in September, with inflows of `16,500 crore as of September 17. This trend reversal is significant: out of the 12 trading sessions this month, FIIs have been net buyers in nine. FIIs have historically been key players in the Indian equity market, often acting as a barometer of market sentiment.

The question that looms large is: Why this sudden change of heart, and is it here to stay? FIIs have been offloading their positions in Indian equities due to a combination of uncertainties both globally and domestically and a general risk-off sentiment. However, the tide seems to be turning. The renewed inflows in September signal a revived interest in Indian equities, with investments flowing into both secondary markets and initial public offerings (IPOs).

This influx suggests a strategic shift among foreign investors, but what’s driving this change? Historically, FIIs tend to increase their allocations to emerging markets like India during rate cut cycles. With global rate cuts on the horizon, India’s robust equity market is poised to attract a significant share of this allocation. Comparatively, Indian markets have shown more stability than their global counterparts, presenting a favourable environment for foreign investors.

The Indian economy remains resilient, corporate earnings have been steady and there are no glaring signs of economic weakness—all being factors boosting investor confidence. Furthermore, FIIs’ holdings in BSE 500 companies are currently at multi-year lows, suggesting ample room for reinvestment, which could further fuel market returns. However, several factors will determine the short-term trajectory of the FIIs’ engagement with Indian equities. Given that, our cover story discusses how global geopolitical tensions remain a critical risk factor, as any escalation could impact investor sentiment.

Nonetheless, a study of over the past 84 years indicates that geopolitical events have rarely had a long-lasting impact on the equity markets, typically affecting them for no more than three months. Additionally, the upcoming quarterly financial results will be under the microscope, especially after the underwhelming performance in the previous quarter. The next two quarters will be crucial, and their outcomes will likely dictate whether the recent FII inflows represent a sustainable trend or merely a temporary resurgence.

Conversely, falling interest rates have often coincided with market declines, as the decelerating economic conditions overshadow the perceived benefits of lower rates. However, the current scenario might differ. The US Federal Reserve has managed economic conditions more effectively than in the past cycles, potentially mitigating the adverse effects on both the economy and equity markets. This unique handling could set the stage for a more favourable environment for equities, despite the rate cuts.

Not all the sectors will be impacted equally by falling interest rates. In one of our special reports, we identify that non-banking financial companies (NBFCs) stand to gain the most in the initial stages of a rate cut cycle. These companies typically benefit from lower borrowing costs, which can improve their margins and financial performance. Investors looking for sector-specific opportunities would do well to keep a close eye on these developments.

In conclusion, while the FIIs’ renewed interest is a positive sign, the market’s future course will be shaped by multiple factors, including geopolitical developments and corporate earnings’ performance. Stay tuned with DSIJ, as the next few quarters will be pivotal in determining whether this FII comeback is a temporary phenomenon or the beginning of a sustained rally in the Indian equity markets. Your investments can then adopt a guided path to generating more wealth as the trends change.

RAJESH V PADODE
Managing Director & Editor