The Indian benchmark equity indices may well be touching new record highs on a regular basis but foreign portfolio investors (FPIs) are surely slowing their pace of investments in the Indian stock markets.
According to data from the National Securities Depository Limited, foreign investors have pumped in a paltry $134 million in August till date. If one takes into account only the months in which FPIs have been net buyers, then this is the lowest monthly inflow since January 2014 when FPIs bought shares worth $125 million.
Incidentally, there have been just three occasions since 2014 when FPIs put in less than $200 million in a single month where they ended as net buyers.
The marginal buying in August, however, has come on the back of net sales of $1.5 billion in July though it is just a fraction of what FPIs bought in some of the earlier months of the current calendar year. The first three months of 2021 saw FPIs buy shares worth more than $7.6 billion.
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Market participants attribute the slowdown to a combination of factors including the signals that the US Federal Reserve is close to tapering while considering raising interest rates soon, expensive valuations of the Indian market vis-├а-vis some of the other emerging markets and concerns related to the impact of a potential third wave of the pandemic.
Any interest rate rise in the US impacts foreign flows globally, including in the Indian markets, as the return spread narrows. Currently, the interest rate in the US is close to zero, which has made global investors look elsewhere for returns.
тАЬLooking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this yearтАж,тАЭ stated the minutes of the US Fed meeting held on July 27-28. The details were released earlier this month in line with the norms that minutes can be made available three weeks after the policy meeting.
Last week, however, US Federal Reserve Chairman Jerome Powell said that while the Fed could look at reducing the monthly bond purchases, it is not in a hurry to increase interest rates. In terms of returns and valuations as well, the Indian market has raced ahead of its peers making it look expensive with the upside capped compared to other markets.
The BSE Sensex has gained over 18% in the current calendar year and is the best performing index among the leading Asian indices. JapanтАЩs Nikkei has gained less than 2% in 2021 while South KoreaтАЩs Kospi is up less than 7%. Hong KongтАЩs Hang Seng has in fact lost over 7% while only TaiwanтАЩs TSEC is the only index that is close to its Indian counterpart in terms of returns тАУ it has gained a little less than 17% in this year.
FPIs have always been looked upon as the prime drivers of any bull run in the Indian stock markets but this time the flows seem to be coming more from domestic institutions and retail investors. Equity schemes of mutual funds saw a net inflow of nearly тВ╣22,600 crore in July, which was significantly higher than some of the previous months.
