FII inflowsin first half of 2019 at highest in 5 years
Foreign institutional investors (FIIs) have been aggressive on Indian equities in the first six months of 2019 despite increased volatility and uncertainty around the elections.
FIIs were net buyers of local equities worth $11.41 billion between January and June, the most since the corresponding period of 2014, when they had invested forex worth $9.91 billion. In the six months ended December 2018, FIIs saw an outflow of $3.78 billion. The outflow in January to June 2018 was $681 million.
The inflows, however, did not kick-start on a strong note. FIIs were net sellers in Indian equities worth $75.35 million in January. The pace of foreign money inflows started picking from February and, over the following five months, FIIs invested $11.5 billion. In June alone, FIIs were net buyers of $231.45 million in equities.
Analysts say FII flows during February, March and April were largely driven by global factors. The precursor of it was the shift in stance on monetary policy outlook by various central banks, which led to an improvement in global liquidity. On January 31, the US Federal Reserve announced a pause in rate hike, which was followed by China and the European Central Bank providing stimulus for their economies. This, along with expectations of a positive outcome of the US-China trade talks, bolstered risk-on sentiments among foreign investors who diverted huge investments towards emerging markets.
Himanshu Srivastava, senior analyst and manager (research) at Morningstar Investment Adviser India, said India was a relatively late beneficiary of the sudden influx of foreign money due to persistent domestic concerns, including political uncertainty and an increase in cross-border tensions with Pakistan. “Some of these concerns alleviated later and India started receiving its share of flows directed towards emerging markets,” he added.
There was a slowdown in foreign flows into domestic equity markets in the early part of May. While the fallout of the US-China trade talk, slowing global economy and declining liquidity impacted the flows, the impending general election results prompted FIIs to adopt a wait-and-watch stance toward India. From May 1-20, FIIs were net sellers in the Indian equity markets. After that, FIIs started coming back to Indian equities, anticipating a return for the National Democratic Alliance (NDA) government. The net inflows intensified after the election results on May 23, which gave a clear majority to the NDA.
The pace of net inflows by FIIs has now slowed due to a surge in crude prices, as well as rising tension in West Asia between the US and Iran. Escalation in the trade war, too, put investors on tenterhooks.
“Also, with elections over and euphoria around it subsiding, the focus will now be on the steps that the government takes in order to bring the economy back on track. This, too, resulted in the slowdown of flows. Foreign investors would have adopted a wait-and-watch stance ahead of the budget announcement on July 5. The focus there would be on the government’s roadmap towards fiscal consolidation, the fiscal deficit target, and the steps it would take to propel economic growth,” said Srivastava.
In the first six months of 2019, crude prices rose 23.98% while the rupee strengthened by 1.09%.
Domestic institutional investors, including mutual funds and insurance firms, have been on the sidelines in the first six months of the year. They have been net sellers of Indian shares worth Rs. 7,791.48 crore so far this year, owing to slower-than-expected growth and election uncertainty.
In local currency terms, benchmark indices Sensex and Nifty have risen 8-9% so far this year. In dollar terms, both Sensex and Nifty were up 9-10% each so far in 2019.