Increasing liquidity pulls FPIs to Indian stocks in June, monthly investment crosses pre-Covid levels

Experts believe that if more large cap companies were to hit the market, it could lead to a rise in FPI buying.

By Urvashi Valecha

Buying by foreign portfolio investors (FPIs) in June has surpassed pre-Covid-19 levels in June. In June, foreign inevstors invested $2.73 billion in Indian equities, which is the highest this year. The FPI inflows come amid a rush of liquidity in the markets globally after central banks around the world announced stimulus measures to help their economies.

According to data on NSDL, the inflows in January stood at $1.3 billion against the June inflow of $2.73 billion. The inflows have currently become higher than the pre-Covid-19 levels in January where the markets were at all-time highs with the benchmark Sensex and Nifty trading at the 42,000 and 12,300 mark respectively. The huge meltdown in March when the equity markets hit a trough amid the Covid-19 pandemic and the fear of its economic effects caused the FPIs to pull out as much as $8.3 billion from the equity markets. Thereafter, they remained sellers throughout April and turned into marginal buyers during May. The velocity of buying has increased in June with the daily average inflow at $130 million, a huge swing from the daily average outflow of $419 million in March.

While, the stimulus measures given by the G4 central banks such as the US Federal Reserve, Bank of England, European Central Bank, and Bank of Japan, have helped fill the global markets with liquidity, marquee Indian companies tapping the secondary stock market by raising funds also contributed towards the increase in FPI flows. In the first week of June, Kotak Mahindra Bank’s promoter Uday Kotak sold a part of his stake in the bank to meet regulatory requirements. Additionally, Standard Life sold a part of its stake in the HDFC Life Insurance through a block deal. This caused a surge in the daily average buying by FPIs which stood at $519.62 million in the first week of June. During that time, the market saw FPI buying worth $2.59 billion in total. “It is a fact that the huge block deals that took place throughout the month of June were responsible for a large part of the FPI flows. It is interesting because at the time when the economic conditions are averse, the FPIs are still buying quality stocks such as Kotak Mahindra Bank and HDFC Life among others,” said G Chokkalingam, chief investment officer, Equinomic Research and Advisory.

Stock markets globally have ended June in the green in dollar terms. The US’ Dow Jones rallied by 0.84%. European markets in the United Kingdom, France, and Germany, were up by 1.39%, 6.41%, and 7.05%, respectively in dollar terms. Asian markets such as Hong Kong’s Hang Seng and South Korea’s Kospi too, were up by 6.4% and 6.89% this month, in dollar terms. Indian benchmarks Sensex and Nifty have seen dollar returns worth 7.6% and 7.8% this month.

Experts believe that if more large cap companies were to hit the market, it could lead to a rise in FPI buying. “The leaders and quality names will remain in demand, if they hit the markets, but it may not be the case with small and midcap stocks now due to adverse economic conditions. Leaders would be able to ride through current crisis time. Leaders have created wealth for FPIs over a period of time so the long term prospect of such names is good. The current Covid-19 pandemic is a one-off event for this year and by January 2021 , either a vaccine would have been found or herd immunity might have happened, which could reverse the prospects of the economy and markets next year. This is why there could be buying on part of the FPIs through placements for many large quality companies,” said G Chokkalingam.

Going ahead, given that most global companies start announcing their results in July the global markets could see a correction. Rusmik Oza, executive vice president — head of fundamental research, Kotak Securities, said, “One cannot say that the tide has turned because Indian markets started recovering in line with the global recovery but, July could see the trend reverse since many global companies would start announcing their results which would have the impact of Covid-19 which could lead to the markets seeing a correction.”