China’s loss, India’s gain! July sees foreign investors back in Indian stock market

After taking money out of the Indian market in May and June, foreign portfolio investors have returned to Dalal Street in a big way to pump in Rs 5,560 crore so far in July.

The week gone by itself has seen the Sensex add over 800 points and foreign investors seem to be returning to the equity bright spot called India. In fact, China’s loss could well prove to be a gain for the Indian stock market.  After taking money out of the Indian market in May and June, foreign portfolio investors have returned to Dalal Street in a big way to pump in Rs 5,560 crore so far in July. Globally, we had the settlement of the stalemate over Iran nuclear talks and some deal regarding the Greece debt crisis.

The meltdown in the Chinese stock market had triggered risk-off trade across emerging markets. Stocks in mainland China, which rose as much as 150% over the past one year, crashed 30 per cent in the middle of June. But after active intervention by the government to check the rout, Chinese stocks have more or less settled down with a downward bias and investors have started returning to risky assets.

The temporary settlement of the Greece debt crisis and the Iran nuclear deal gave near-term global worries a back seat leading to a spike in stock prices in several markets across the world.

The return of FIIs to the Indian market is significant as they had started to exit the Indian market not because of global cues but largely because of domestic concerns. There were worries that the government’s policy agenda had got stuck in a political quagmire. The signs of revival in the economy were mixed as different data points showed uptick and downtick at regular intervals. Moreover, India Inc has showed little signs of profit revival.

While the March quarter earnings offered nothing to write home about, the outlook for June quarter earnings is not really encouraging though a handful of companies are expected to do better.

What has, however, improved, are a few macro indicators. Core inflation is down in India, even though food prices are showing signs of strengthening over the past two months. Industrial output is looking up, signalling that the green shoots of revival are actually taking roots. Plus, the outlook for commodity prices, including crude, is benign at this stage, mainly because of the slowdown in China where economic growth has fallen from around 10 per cent to 7 per cent level. Crude prices are ruling significantly lower and the Iran nuclear deal now raised hope of further weakening the prices. Plus, the rupee has showed a lot of resilience amid strong global headwinds, which have weakened many other global currencies.

All these factors seem to have turned India a clear favourite for foreign portfolio investors. The fact that they are buying into both largecap and midcap stocks only goes on to show their increased confidence level on Indian equities. Both largecap and madcap stocks have risen about 3 per cent this month, backed by foreign portfolio investors buying across sectors as they covered their short positions.
 
But with a rate hike by the US Fed Reserve due later this year, it remains to be seen how long these FPIs stay put in Indian equities.