Foreign Portfolio investment into equities turns positive year-to-date, is it time to turn cautious?

Since May began, data provided by NSDL shows that FPI and FII investment has reached Rs 66,165 crore.

After months of hovering in the negative territory, Foreign Portfolio Investment (FPI) into domestic equity markets has finally turned positive year-to-date. On the back of strong inflows being pushed into the equity segment since the month of May began, now FPI investment calendar year-to-date stands at Rs 11,242 crore. This month foreign investment into equity markets has climbed up to Rs 22,192 crore with still over half the month remaining. However, market experts are advising investors to tread cautiously as the investment flows could be temporary and as liquidity diminishes investment may steer away from domestic equities.

Foreign investment in equity markets in the month of January stood at Rs 12,123 crore while in February the number was at Rs 1,820 crore. However, in March as the coronavirus pandemic wreaked havoc across the world, FPIs and FIIs took away Rs 61,973 crore and in April pulled out another Rs 6,884 crore. Equity markets across the globe were seen tanking as investors rushed to safer havens and even preferred keeping cash in hand. The trend changed as markets looked to recoup from the fear of the pandemic. Since May began, data provided by NSDL shows that FPI and FII investment has reached Rs 66,165 crore.

“The United States is printing money on a continuous basis and that is why money is flowing into India or probably the world markets,” Vishal Wagh, Head of Research Bonanza Portfolio told Financial Express Online. According to reports the United States Federal Reserve has printed close to $3 billion in little over 3 months as its strategy to tackle the economic fallout of the coronavirus pandemic. Analysts say that as the printing of money stops and once normalcy resumes the inflows could head back, changing the scenario that is currently being played out in the equity markets. 

Foreign funds are flowing into India at a time when the US 10-year Treasury yield stands at  0.6%, offering little returns to investors. “While printing money, the US currently offers a very low rate of interest. Global investors may not be keen to invest in the US so they are hunting for opportunities across emerging markets,” Wagh added. With such ample liquidity in the markets investors have been searching for investment avenues. Markets participants have also said that the liquidity that investors currently have is also the reason why equity markets are not mirroring the economic situation.

Another source for foreign funds to enter is the discounted opening they have found through Qualified Institutional Placements (QIPs). Leading banks and financial institutions along with a large number of companies have entered the market to raise funds. Recently Axis Bank and HDFC announced that they have raised Rs 10,000 crore each via QIPs. ICICI Bank too has announced that it is looking to raise Rs 15,000 crore through QIP. IndiGo’s board earlier this week allowed the aviation giant to raise Rs 4,000 crore through the same route. Heavy flows from QIPs to the top listed companies could also prove disastrous for smallcaps and midcaps.