After record inflows, FIIs may slam brakes on India investment as market valuation surges

India economic growth, India GDP, GDP may be slow in entire year CY 2020, what experts says on GDP data, economic outlook of India, COVID-19 Treatment, monetary policy, rate cut, more stimulus package, infrastructure investmentFactors that fuelled the rush towards Indian markets were the attractive valuations and abundant global liquidity

India has been preferred by Foreign Institutional Investors (FII) over the past few months, as domestic equity markets rose giving investors a viable opportunity to invest. In the month of August, FII inflows reached a total of $6.3 billion, while domestic institutional investors (DII) pulled $0.6 billion away from domestic markets. With such massive inflows, MSCI India is now trading at a premium valuation when compared to emerging markets, said a report by global brokerage and research firm, Bank Of America. Now, this premium valuation could result in near term consolidation for domestic stocks and a slow down in FII flows.

Analysts say that FIIs rushed to invest in India in the month of August as domestic markets were gaining momentum and outperforming global peers. To add to this other factors that fuelled the rush towards Indian markets are the attractive valuations and abundant global liquidity. “FIIs inflows into Indian equities continued to be robust in Aug at ~US$6.3 billion, highest in 5 years. Even adjusted for primary market flows on US$3.9 billion led by banking sector fund raises, FII inflows were still robust at US$2.4 billion,” the report said.

Foreign investors’ flows were positive across major sectors except Material where outflows of $ 33 million were recorded in the previous month. Financials saw the largest inflows worth $ 1.3 billion in August. Meanwhile DIIs kept pulling money away from markets. “While passive funds shrank by 85% month-on-month to$0.3 billion, active funds continued to see net outflows of $543 million for the second month in a row, with withdrawals across fund types,” Bank of America said. Market participants continue to expect more outflows from mutual funds in the coming months.

While India continued to receive inflows from foreign institutional investors, emerging markets peers recorded outflows. In Korea FII outflows stood at $2.3 billion and in Taiwan the outflows were at $2.2 billion. “With MSCI India’s valuation premium to EM currently over 25% above historical average, we think Indian markets could now consolidate near term & incremental FII flows could slow down,” analysts at Bank of America said. FII flows in the current month have been negative $153 million. The report further predicts a near term market consolidation.  Thereafter a rally could be led by select private sector Financials once clarity on NPAs emerges, it adds.

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