FPI bet on Indian equities propels Sensex, Nifty to fresh high levels

Indian benchmark indices BSE Sensex and NSE Nifty logged fresh record highs on Monday as foreign portfolio investors (FPIs) continued to pour money into domestic equities amid growing optimism that global central banks, including the RBI and the U.S. Fed, may go slow on interest rate hikes as inflation starts to cool off. The pause in interest rates as well as ease in inflation may create more confidence in the economy and boost corporate profitability, leading to higher borrowing and more investment for growth and expansion.

On Monday, the 30-share Sensex gained as much as 340 points, or 0.5%, to hit its lifetime high of 66,401 level in intraday trade. Similarly, the Nifty50 climbed 99 points, or 0.5%, to attain a new record high of 19,663.

In the last one month, the Sensex and Nifty50 have rallied as much as 5%, driven by sustained buying by foreign investors. The benchmark indices have gained over 12.5% in the last one quarter, and 8.5% on a year-to-date (YTD) basis.

Meanwhile, the FPIs, which have been continuously buying Indian equities since March this year, have invested ₹30,660 crore in the first fortnight of this month, till July 14. This figure includes investment through bulk deals and primary market, too, apart from investment through stock exchanges, as per NSDL data. Before March, foreign investors had withdrawn a total of ₹34,626 crore in January and February this year.

If the trend continues, FPIs fund infusion may cross the May and June figures of ₹43,838 crore and ₹47,148 crore, respectively. In the calendar year 2023, they have invested ₹1.07 lakh crore, which can be attributed to various factors, such as robust macro indicators, strong corporate earnings, and relatively competitive valuations of Indian equities compared to other emerging markets.

According to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the FPI flows into India are continuing unabated, thanks to the declining trend in the U.S. dollar. Last week, the dollar index fell below 100, the lowest level in one year, which is favourable for emerging markets (EMs).

“India is the largest recipient of FPI flows year-to-date (YTD) among emerging markets. The selling in China continues and FPIs were sellers in EMs like Thailand and Vietnam also recently,” he says.

“Declining dollars is a powerful trigger that can sustain the FPI inflows. The concern, however, is the rising valuations that are getting stretched. The valuations in China (PE is 9) is hugely attractive now compared to valuations in India (PE is around 20) and, therefore, the ‘Sell China, Buy India’ policy of FPIs cannot continue for long,” says Vijayakumar.

ICICI Direct in its technical outlook says, “Going ahead, we reiterate our positive bias and expect the Nifty to gradually head towards our earmarked target of 19,700. The index is showing significant resilience as intermediate corrections are getting bought into. Consequently, the buy on dips strategy has worked well since March-23.”

The research firm says the key point to highlight is that, the U.S. dollar index breakdown below multi-quarter support of 100 indicates a downward acceleration towards 96 in coming months. “This will act as a tailwind for more foreign funds flowing in emerging markets and India is a key beneficiary given strong macros,” it says.

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