After being net sellers for the past two months, FIIs have reversed course on the expectation that reforms will continue even after the elections.Improved GDP growth forecasts and robust earnings from Indian companies have also increased their allure, analysts said.
“Political stability despite the BJP failing to win a majority on its own and a sharp market recovery supported by steady DII buying and active retail buying have forced FIIs to turn buyers in India. They seem to have realised that selling in the best performing market is a wrong strategy. As long as there is no spike in US Treasury yields, FII buying can be sustained,” said Dr VK Vijayakumar, chief investment strategist, Geojit Financial Services.
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India’s inclusion in the JP Morgan bond index is positive as it will reduce the government’s borrowing costs and the cost of capital for Indian companies.
Data for the first two weeks of June shows that FIIs bought shares in real estate, telecom and financial services sectors and sold shares in IT, metals and oil & gas sectors.
“FII purchases are concentrated in a few specific stocks instead of being spread across the market and sectors. This is as Indian equities are still considered overvalued by FIIs. Foreign investors prefer financials, automobile, capital goods, real estate and certain consumer sectors. FIIs are expected to selectively invest in certain sectors and stocks instead of broad-based buying across the market,” said Vipul Bhoir, head of listed investments at Waterfield Advisors.
Going forward, attention will gradually shift to the budget and first quarter earnings, which may determine the sustainability of foreign inflows. “The primary objective of inclusion in the bond index is to attract foreign investment into the Indian bond market instead of the equity market. Once foreign investors get comfortable with the Indian bond market, they may start exploring other investment opportunities, thereby opening up new avenues for growth and diversification. This should be an optimistic outlook for the future of foreign investment in India,” Bhoir said.
“India will continue to be a favourable market for FPI inflows, though actual inflows may not be the highest among emerging markets due to intermittent volatility and shifts in global investor sentiment. However, the long-term outlook remains favourable, providing reassurance about the stability of FII inflows in India,” he said.
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