Despite the economic slowdown and poor performance by the core sector, foreign portfolio investors (FPIs) are gung-ho about India, with investments worth Rs 14,358 crore in October — the largest monthly inflow into equity in the current fiscal year (2019-20).
Total investments by FPIs were to the tune of Rs 19,118 crore in October, including Rs 4,727 crore into the debt market, which is also the highest monthly flow in the current fiscal, according to figures available from the NSDL. The sustained inflow of FPI money is the major reason for the rise in the benchmark Sensex to an all-time peak of 40,129.05 in October, a rise of 1,462 points, say market experts.
Sustenance depends on economic growth
While foreign inflows into the capital market continue unabated, the sustenance of FPI interest mainly hinges on the economic fundamentals. Markets are betting on a revival in the growth in the first or second quarter of next year. If the slowdown deepens, FPIs can exit faster than they entered India. It happened many times in the past.
The renewed interest of FPIs in India and buying by mutual funds have taken the market to an all-time high even though the economic fundamentals are not rosy. Mutual funds, which were getting an average monthly inflow of around Rs 8,000 crore in SIPs (systematic investment plans), are also big buyers. “Economic growth has slowed, consumer spending has come down but the market is getting good inflow of funds from FPIs and funds … and remains at all-time peak,” said veteran BSE dealer Pawan Dharnidharka.
The FPI revival has come after they pulled out around Rs 30,000 crore in July and September. The cut in interest rates by the US Federal Reserve has prompted foreign investors to turn their attention to emerging markets like India where interest rates are still high. The US Fed, last week, cut interest rates for the third time this year as the US economy continued slowing amid ongoing trade disputes and weak global growth. The federal funds rate, which affects the cost of mortgages, credit cards and other borrowing, will now hover between 1.5 per cent and 1.75 per cent. When compared to this, the RBI’s repo rate is 5.15 per cent after the fifth rate cut this year.
The US market is also flying high with the Dow Jones on Friday stopping just short of an all-time high. The S&P 500 and Nasdaq composite scored all-time highs with gains of 1 per cent and 1.1 per cent.
According to Care Ratings, there are indications that there would not be any further rate cut by the Fed in the next policy. But this also means that the dollar can weaken a bit as lower rates in the US imply weaker economy which in turn can push up other currencies. Therefore, the rupee can get some stability on the external front. “Also lower US rates can help to boost FPI debt flows into India which can be taken as a positive. Debt inflows were around $ 1.2 bn in October so far and continuation would help to firm up the rupee further,” it said.
Investors, including FPIs and domestic funds are expecting more tax sops in the coming weeks. “The month of October has seen brisk buying from both FPIs and DIIs. We expect this positive trend to continue as the market awaits more positive news from the Government with regard to major concessions on the LTCG, DDT issues and also some positive expectations on the personal income tax rate reduction to boost consumer demand,” said Rahul Agarwal, Director, Wealth Discovery/EZ Wealth.
What should be worrying the market is that FPI money – considered as hot money — can flow out faster than they entered Indian markets. “The market will eventually witness a setback if the fundamentals don’t get stronger. The growth pace should accelerate from the current level of 5 per cent,” Dharnidharka said.
On the macro front, India Manufacturing PMI fell to a two-year low of 50.6 in October from 51.4 in September. The number suggests that the manufacturing sector is heading towards stagnation as both factory orders and production rising at the weakest rate in two years. Job creation also softened to a six-month low and companies remained reluctant to hold stock with business confidence slipping to its lowest in two years. However, corporate results for the second quarter ended September 2019 were encouraging, indicating that India Inc has managed to withstand slowdown pressures to a great extent at least till now, said an analyst.