FPI flows into Indian equities hit a 5-month high in May, outlook ‘improved significantly’ say analysts

• FPIs have pumped ₹30,946 crore into Indian equities in May so far, the highest in the past 5 months.
  
• After outflows in January and February, FPIs turned net buyers in March, having invested ₹51,516 crore since then, so far.
  
• According to data from NSDL, FPIs have pumped ₹15,516 crore in financial services stocks alone since March.
  

Foreign portfolio investors (FPI) have stepped up their investments in Indian equities. FPIs pumped ₹30,946 crore into Indian equity markets in May so far, hitting a five-month high, sustaining the momentum visible since March this year.

FPIs have aggressively increased their investments in Indian equities since March – after outflows in January and February. They turned net buyers in March, having invested ₹51,516 crore since then so far.

This also helped the benchmark indices Sensex and Nifty50 wipe out their losses in 2023. They fell by nearly 7% from the beginning of 2023, till the third week of March. However, strong FPI inflows have helped the Nifty50 rise, and recouped what it’s lost since the beginning of the year.

Sectorally, it’s the Nifty Bank index which has led the rally in the benchmark index in this period, rising by nearly 13% after bottoming out in March. The benchmark Nifty50 index has moved in tandem with the Nifty Bank index.

Going by analysts, the rally is not over yet – in fact, the FPI outlook has “improved significantly” for a few reasons. “Outlook for FPI flows has improved significantly given the peak of the quantitative tightening cycle in the US and India’s relative outperformance to global equities recently,” said a report by ICICI Securities.

Aiding the rally in financial stocks is a sustained flow of investments from FPIs since March when the tide turned for Indian markets. According to data from NSDL, FPIs have pumped ₹15,516 crore in financial services stocks since March. More than half of it, that is ₹8,382 crore, has come in the first week of May.

FPIs load up on risk

Among other factors, increasing expectations of the end of the quantitative tightening cycle in the US has brought FPIs flocking back to Indian equities. On closer inspection, analysts at ICICI Securities underline that FPIs are pouring money into long-term bets like cyclical and capital-intensive stocks.

“FPIs continued buying risk (high beta and value stocks) in the form of stocks largely related to cyclical and capital-intensive sectors (financials, industrials, discretionary consumption, metals),” the report said.

This aligns perfectly with analyst expectations of capital-intensive, cyclical and value stocks continuing to outperform others.

ICICI Securities insists that this is not a false beta rally since these three kinds of stocks have continued to outperform despite the aggressive quantitative tightening cycle and interest rate hikes by the US Fed. A beta rally is generally short-lived.

“Relentless FPI buying, declining inflation, the market momentum and good results from the rally-leader financials can sustain this rally even with occasional corrections,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Analysts maintain their optimism about Indian equity markets, stating that while the near-term uncertainty might be confusing, over the long-term, the current market conditions are good for deploying a ‘buy on dips’ strategy.

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