The week ended on a positive note for Indian markets for more than one reason. Not only did the benchmark indices Nifty and Sensex close at the highest levels since January, the foreign institutional investors (FIIs) saw a comeback of sorts. FIIs bought (net of sales) equities worth as much as Rs 14,670 crore in the last three sessions of this holiday-shortened week. Is this a definitive trend reversal then or just a blip?
The key drivers for FII inflows include strong economic fundamentals and India’s relatively attractive valuations. These along with a host of global factors dictate the direction of flows globally.
The dollar’s strength was one of the key reasons that we saw a definitive flight to dollar denominated assets towards the last quarter of 2024, However, in the last two months, the dollar has lost a lot of its charm, making emerging market relatively more attractive.
Two big worries for FIIs in India
Here is a look at the two key factors that could impact the investment flows into India
India’s valuations vs other EMs
Though the Indian markets have seen significant correction lately, the MSCI India Index still trades around 20.02x earnings. This in comparison is significantly higher than the MSCI EM Index (Emerging Market index) which is trading close to 13x. This gap in valuations is significantly lower than during the 2021 peak but it is still significantly above the pre-pandemic 5-year average of around 6.5x.
The other big concern area for FPIs has been SEBI’s proposal to extend disclosure requirements for FPIs. According to SEBI, the granular disclosure limits for Foreign Portfolio Investors was increased to Rs 50,000 crore of assets under management from Rs 25,000 crore so far. While the market regulator maintained that the steps were initiated to bring about greater transparency and encourage better corporate governance, many experts are now wondering whether the move can be counterproductive.
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