FII inflows may remain consistent in May with turn in rate cycle

FII inflows may remain consistent in May with turn in rate cycle
  • FII inflows in May are typically erratic due to several factors impacting the domestic markets like monsoon predictions, elections and so on.
  • But this year, FII flows in May have been positive and the trend may continue, say analysts.
  • Also, FII inflows have remained persistent amid weakness in the US Dollar index.
Foreign institutional investors (FIIs) have been on a buying spree so far in May – investing as much as ₹13,278 crore in equities as they turned net buyers on all days of this month.

FII inflows in May are usually erratic due to several key factors including monsoon predictions. But this year, the FII flows are on a positive spree and the trend may continue, as per analysts.

“Typically, several factors impact FIIs inflows in May every year including prediction of monsoon, if there is election and macro economic situation,” Shrikant Chouhan, head of equity research (retail), Kotak Securities told Business Insider.

In 2022, FIIs pulled out ₹1.21 lakh crore. The selling continued in the first two months of 2023 before gradually reversing in March and April — with inflows of ₹1,997 crore and ₹5,711 crore respectively.

“FIIs are net sellers on a year-to-date basis. However, some recovery was seen in the last one month. FIIs have pulled out the majority of the easy money from the Indian market, which they had pumped in after the Covid-19 crisis in March 2020. They have pulled out $23 billion in FY22/23 out of $37 billion pumped in FY21. Nonetheless, the pace of selling has reduced in the last three months,” said a report by Axis Securities.


FII flows are gradually trending higher amid easing macroeconomic situation and hopes of a pause in interest rates cycle soon. India Meteorological Department (IMD) has also forecast a normal rainfall this year. Also, FIIs inflows have remained persistent amid weakness in the US Dollar index, which has weakened over 1.5% in the last three months.

Rising interest rates make debt funds in developed nations attractive. This is one of the key factors for FIIs pulling out money from Indian markets and allocating it to such countries. Post Covid, the Russia-Ukraine crisis and elevated inflation in the country also impacted inflows.

FII flows in May 2023
May 2023Net inflow by FIIs
May 2₹1,997 crore
May 3₹1,338 crore
May 4₹1,414 crore
May 5₹777 crore
May 8₹2,123 crore
May 9₹1,942 crore
May 10₹1,833 crore
May 11₹837 crore
May 12₹1,014 crore

“In the last one and a half years, India failed to attract consistent FII money since our markets had become expensive compared to developed markets. And since interest rates went higher and higher in the developed markets, FII money shifted their money in such markets,” said Chouhan.

However, the interest rates cycle finally seems to be turning. In the latest US Fed meeting in May, it signaled that the current tightening cycle is at an end, raising expectations for a pause in interest rates soon.

“There is hope that the US Fed may cut rates in the coming 1-2 meetings. And it is clear that in the US, the next cycle will be a recession. So, FIIs may not invest there and rather invest in countries where there is growth – like India. And valuation-wise also India has become attractive compared to its position six months back. Also, whenever there is a possibility of a rate cut or the cycle is going to turn, FIIs start shifting their funds from bond to equity,” added Chouhan.

Hopes of the US Fed pausing rates sooner also gave a boost to the domestic market that has been highly volatile this year. The Sensex has gained nearly 3% in the last one month alone, crossing the crucial mark of 62,000. It has gained 1.51% so far this year.

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