November records highest FPI inflows

On November 25, the S&P BSE Sensex saw a new life-high of 44,825.37 points—an addition of 19,186.47 points over the 52-week low of 25,638.90 points touched on March 24. In percentage terms the recovery is nearly 75% in a matter of 170 trading days.

At a time when the Covid-19 hit economy is struggling to float above the recessionary waves, the equity markets are booming in bull zone. And foreign portfolio investment (FPI) flows are catalysing on this.

In March, when the 30-stock Sensex touched its low-point in recent times, FPIs registered a record single–month outflow of ₹1,18,203 crore ($15.92 billion) in total. While equities saw an outflow of ₹61,973 crore, debt saw an outflow of ₹60,376 crore.

But eight months later, in November, FPIs have turned net investors in equities to the tune of ₹60,358 crore, the highest when 11 months comparison is done for the last five years from 2016 to 2020. In total terms, November recorded total inflows of ₹62,782 crore ($8.46 billion).

While March saw a double whammy of record equity and debt outflows, the later months of the year proved helpful in recovering from the blow. For instance, August saw net equity inflows of ₹47,080 crore followed by ₹21,832 and ₹19,541 crore in June and October respectively.

In terms of total, June, August and October recorded total inflow of ₹26,009 crore ($3.44 billion), ₹49,879 crore ($6.66 billion) and ₹21,826 crore ($2.94 billion) respectively.

If one were to look at FPIs’ total monthly performance in November alone, since 2016, this year’s ₹62,782 crore is the highest compared to net equity inflows of ₹22,999 crore, ₹20,258 crore, and ₹11,595 crore in November of 2019, 2017, and 2018 respectively. In November 2016, FPIs had recorded total outflow of ₹39,396 crore.

On the equities front, FPIs’ ₹60,358 crore net inflows in November this year are highest compared to ₹25,231 crore, 19,728 crore, and ₹5,981 crore during 2019, 2017, and 2018 respectively. On the contrary, November 2016 recorded outflows in equities worth ₹18,244 crore.

While the indices are booming, and foreign investment inflows are on the rise, analysts are still advising caution. “Given the massive amount of FPI inflows, market participants should surely rejoice, however, it is time to be cautious too since the current liquidity and optimism-led rally is majorly driven by market sentiments,” warns Nirali Shah, senior research analyst at Mumbai–based Samco Securities. “And during such a mad chase for momentum, investors often disregard fundamentals.”

Taking a holistic view on FPIs, as well as domestic mutual funds (domestic institutional investors, or DII), Shah is of the view that liquidity can still take markets higher, albeit any unpleasant event can cause corrections in bourses. “Risk and reward are unfavourable for both traders and investors currently,” she warns.

Particularly on the record FPI equity inflows during November this year, Shah highlights that a rejig in MSCI Global Standard Index, effective November 30, and a possible increase in India’s weight in the global index led many international fund houses to undergo a massive rejig in their portfolios due to which India witnessed massive monthly inflows.

Shah further warns that with the MSCI rejig over, it seems unlikely that the FPIs will continue to invest in India with the same aggression in the weeks ahead. “Therefore, considering net of FPI and DII behaviour going forward it seems likely that there will be pressure on D-Street going forward which might lead to a correction.”

Overall, it’s time to tighten the seat belts in the peaking market which is not in sync with the larger economy which has been witnessing contraction owing to the Covid-19 pandemic.