The FPI Favourites & Unfavoured

One of the fastest growing economies and most stable currencies compared to others has strengthened India’s macroeconomic outlook, thereby attracting foreign investors.

Despite some recent unease, the Indian equity markets have maintained their position as one of the top-performing global equity indices since April 2023. Frontline equity indices have experienced robust growth in the mid-teens, while broader equity indices have surged in the mid-twenties. This impressive performance can be attributed to several factors, including a favourable domestic macroeconomic environment and the anticipation of India experiencing one of the highest growth rates in the coming years. This positive outlook has also captured the attention of foreign investors, further bolstering the market’s upward trajectory. 

Foreign portfolio investors (FPIs) are individuals or entities that make investments in the financial assets of other countries. FPIs include individual investors, institutional investors, central banks, and even governments. Stocks, bonds, mutual funds, exchange-traded funds, American depository receipts (ADRs) and global depository receipts (GDRs) are a few examples of financial instruments that are employed. FPIs can have a significant impact on the economies of the countries in which they invest since their unexpected buying or selling can create a major change in stock prices, which, depending on the situation, could result in either economic growth or instability.
 

Reasons for FPIs’ Enthusiasm about Indian Markets

According to market experts, in the last quarter of 2023, there were evident significant flows to China, prompted by China’s re-opening following the corona virus pandemic and anticipation of resurgence in GDP growth and profitability of Chinese companies. This led to investors selling Indian stocks and investing in Chinese companies, believing that Chinese equity indices are cheap and the Indian equity market is costly. Nevertheless, the situation changed as time progressed and the Chinese economy failed to show strength and faltered. India’s economy, on the other hand, grew by 6.1 per cent in the fourth quarter of FY23, resulting in an annual growth rate of 7.2 per cent. 

This growth was powered by the country’s robust performance in the services sector, which further cemented India’s status as one of the world’s fastest growing economies. Additionally, among the major currencies, the Indian rupee emerged as one of the least volatile. The Russia-Ukraine war and the tightening of monetary policy by central banks to control surging inflation were the primary causes of the Indian rupee’s substantial depreciation against the US dollar in FY23. However, in this financial year, the currency has stabilised as it has moved in a narrow range while moderately appreciating.   

In the fourth quarter of the financial year 2022-23, the country’s current account deficit (CAD), which calculates the difference between exports and imports of goods and services, lowered to 0.2 per cent of the GDP. The growth of India’s eight key infrastructure sectors also accelerated to 8.2 per cent in June, the fastest in five months, boosted by a sharp rise in steel production and nearly double-digit increases in coal and cement production. India’s foreign exchange reserves as on July 14, 2023 increased for a third week in a row to surpass USD 600 billion, the highest level in nearly 15 months. Since the realisation that the Chinese economy is struggling and the Indian economy is faring much better, the FPI approach has shifted, resulting in sizeable inflows into the Indian markets. 

FPIs persisted in demonstrating faith in Indian equities while recognising the Indian market to be stable and reliable due to the country’s improving macroeconomic outlook and the anticipated stronger corporate earnings’ season. Moreover, one of the biggest single-day FII inflows was also recorded during the period. As a result, the last few months have been extremely upbeat as Indian benchmark indices, which had been fluctuating in a particular range, had a significant boost and managed to reach all-time highs not only once but also set new records in back-to-back sessions. In the following paragraphs we will delve into which are the sectors and companies that have attracted inflows and those from where they have withdrawn.
 

Favourite Sectors of FPIs Financial Services

   

Considering sector-wise net investments during the June-July period, the financial services sector attracted a sizeable amount of inflows as corporate profits were led by financials. The vast majority of banks reported outstanding Quarterly Results, with notable boosts in net interest income and net profits, supported by solid loan growth. In June 2023, retail loans advanced by 20.9 per cent on an annual basis, primarily due to home and automobile loans. In addition to benefiting from higher interest rates as the net interest margin increased, banks were also able to successfully enhance the asset quality of non-performing assets.   

 The collapse of major banks and other financial institutions caused a banking crisis that affected major economies. However, the Indian banking system remained resilient through managing credit, market and liquidity risks. Finance, on the other hand, is kicking into high gear in the country, with substantial developments. Following a merger, HDFC Bank, an Indian bank, emerged as one of the most valuable banks in the world for the first time. India has been focusing on expanding the reach of its banking system through various initiatives including the ‘Pradhan Mantri Jan Dhan Yojana’ and ‘Post Payment Banks’. Digital payment methods have also grown dramatically in recent years.   

The Reserve Bank of India (RBI) has been working on improving financial inclusion, and it recently declared that regional rural banks would have greater freedom to pool resources and use them where they are most needed within their respective geographical boundaries. As part of its attempts to boost bilateral trade in domestic currencies, the RBI has given 20 banks permission to open ‘special rupee vostro accounts’ of partner banks from 22 countries. All of these factors collectively might have strengthened the confidence of foreign investors, encouraging them to make investments in India.   

Power

   

The power and utilities sector suffered a bloodbath as a result of the massive sell-off caused by allegations made against the Adani Group by the US-based investment research firm Hindenburg Research. The sectoral index BSE Power plunged around 25 per cent in just two months, impacting the overall market sentiment. The Hindenburg effect was later lessened after the RBI requested information from banks regarding their exposure to Adani Group firms and it was declared that the exposure was not very significant and that a single case could not impact the system. The power sector then experienced a robust revival, backed by substantial foreign investment.   
 

 While the Indian state governments were approving various power projects taking into account the needs of the country, numerous power companies were frequently in the spotlight due to securing significant orders on a domestic and global level. The Adani Group has announced the commissioning of India’s first transnational power project to export electricity to the Bangladesh electrical grid. India is the third-largest producer and consumer of electricity worldwide. Although the country has enough capacity to generate electricity, a sizeable section of the population still lacks access to suitable transmission and distribution systems.   
 

 The goal of the ‘Pradhan Mantri Sahaj Bijli Har Ghar Yojana – Saubhagya’ is to accomplish universal household electrification in the country by supplying last-mile connectivity and electricity connections to all the unconnected households in rural and urban regions. The government stated that thermal power plants would meet 75 per cent of India’s electricity needs in financial year 2023- 24. In addition, 18 coal-based thermal power projects, one gasbased thermal power project and 42 hydro-electric projects are under construction to boost the country’s power generation capacity. Due to heavy rains in the country, the power consumption was impacted considerably. Yet, in July, it managed to grow by 8.4 per cent to 139 billion units over the same month last year.

    


FMCG

   

According to Morgan Stanley, India’s retail inflation is predicted to surge to 6.2 per cent at the end of the September quarter with an increase in food prices serving as the main driver of this inflation hike. Consumers and businesses are both concerned about the rising cost of basic goods. Despite the fact that local brands lack the ability to deal with pricing pressures during inflation whereas major brands have an advantage, Indian local FMCG brands are developing stronger than national brands and rural and semi-urban areas are emerging as new growth areas. Sales of groceries and other necessities grew significantly as retailers prepared for the upcoming holiday season, providing investors with an excellent opportunity to invest at the right time. A significant amount of investments were also recorded in the capital goods, automobile and oil and gas sectors, whereas investments in chemicals, real estate and services were minimal.
 

Sectors That Failed to Attract FPIs- Information Technology


   

Indian IT companies had a muted start to Q1FY24, echoing the slowdown in the global IT industry, and overall reported a modest growth in revenue and net profit. The BSE Information Technology index barely managed a 1-2 per cent gain over the previous year, reflecting investors’ lack of enthusiasm for the sector due to a variety of factors, the most important of which were attrition rates and recessionary fears. Renowned companies such as TCS and Infosys have undergone eyecatching senior leadership transition. Major IT companies have already made significant layoffs due to worries over profit margins.   

Some companies even limited the number of clients they served in order to focus on profitable deals. The clients of IT companies, on the other side, have lowered their spending due to the gloomy outlook. The IT industry has recently been hit hard by significant setback at Infosys. Shares of Infosys plunged nearly 9 per cent in just one session after the company’s results fell short of market expectations and its revised FY24 revenue growth outlook has been lowered from 4-7 per cent to 1-3.5 per cent. Foreign investors, as a result, prefer not to invest in the sector due to its lacklustre prospects, at least in the near future.   
 

Textiles and Chemicals 

While the Indian economy as a whole is relatively healthy and outperforming other major economies, the textile and chemical sectors are underperforming, both suffering from higher input costs and a reduction in demand. The availability of low-cost imported clothing has caused a major fall in textile exports. Most chemical companies reported worse-than-expected results with little to no growth in revenue and net profit. Profit margins have been impacted as major corporations have reduced the prices of their goods to compete in the market. For example, Tata Chemicals cut domestic soda ash prices again after a few months due to better product availability in the international market.   
 

Most Preferred and Distrusted Companies for FPIs 

As previously discussed, foreign portfolio investors have been drawn to banks and financial services’ sector companies due to their robust quarter performance and optimistic future outlook. Four out of the top 10 companies with the greatest FPI holdings as of the quarter ended June 2023 are banks, led by Axis Bank. FPIs not only retained their sizable stake in the bank, but also raised their stake by 2.95 per cent, bringing the total to 52 per cent. In comparison to the same quarter in the previous year, the net profit of Axis Bank soared around 41 per cent to ₹5,797 crore.   

The interest income for the April-June quarter totalled ₹25,556.77 crore, a substantial 36 per cent growth over the same period of the last year. Investors increased their stakes in Cyient Ltd., HDFC Bank and Apollo Hospitals Enterprises while decreasing their holdings in Infosys following disappointing results and a lowered expectation for FY24 revenue growth. Vikas Ecotech, Ugro Capital and Kamdhenu Ventures were successful in attracting FPIs, leading to a major gain in stake during the last quarter. However, Accuracy Shipping, Axita Cotton and Sansera Engineering failed to uphold investor confidence as significant stakes were sold by investors. 

Understanding Foreign Investments

In foreign direct investments (FDIs), the investor acquires at least 10 per cent of the equity in a foreign company in order to gain a controlling position. The investment is made with the intention of developing a long-term business relationship in the foreign country, providing the investor an influential role in the operation of the company. FPI, in contrast to FDI, does not include the acquisition of a controlling stake in the business. Investors buy and sell assets based on short-term market trends. Foreign institutional investors (FIIs), a subset of FPI, can be an individual investor or a group of investors with a sizeable investment value who are well-regulated. It includes financial institutions including insurance firms, mutual funds, hedge funds, and pension funds.

New FPI Regulations in India 

The FPI regime is a pathway for foreign investments in India that is governed by the Securities and Exchange Board of India (SEBI). SEBI has announced that FPIs would now be required to make additional disclosures if they hold more than 50 per cent of their Indian equities’ AUM in a single Indian business or more than `25,000 crore of equity AUM in the Indian markets. This decision will make it easier to address issues like those brought about by US-based Hindenburg Research over suspicions that several FPIs have a sizeable position in the listed companies of the Adani Group. It will further assist in preventing potential violations of the minimum public shareholding rules or any possible misuse of the FPI investment route. Therefore, it can be concluded that India is welcoming foreign investments with the ambition to develop further, but with caution in order to protect the interests of investors and businesses.