FIIs Go on a Shopping Spree in June; Will the Buying Binge Last Despite Valuation Concerns?

In June, foreign institutional investors (FIIs) bought Indian stocks worth around Rs 26,565 crore. This buying spree happened just before the Union Budget announcement and India’s inclusion in JP Morgan’s bond index. Investors are hopeful about continued reforms after the elections, which has driven this interest.

Despite concerns related to the elections, FIIs turned net buyers in June. Analysts say that better GDP forecasts and strong earnings from Indian companies have also attracted these investors.

Political stability, even though the BJP did not secure a majority on its own, along with a market rebound supported by domestic institutional investors (DIIs) and aggressive retail buying, has encouraged FIIs to invest in India, according to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. He mentioned that FIIs seem to have realized that selling in a strong market would be a mistake.

The government’s continuity after the elections ensures ongoing reforms, leading to better GDP growth forecasts and attracting Foreign Portfolio Investment (FPI) buying. However, Vipul Bhowar, Director of Listed Investments at Waterfield Advisors, noted that FPI buying has been concentrated in a few specific stocks rather than across the entire market. This is because Indian equities are still seen as overvalued by FPIs, who are favoring sectors like financials, auto, capital goods, real estate, and select consumer sectors.

Analysts believe that the market could become volatile again due to high valuations and unchanged interest rates, which might prompt investors to book profits regularly. However, it is expected that FPIs will continue to make selective investments in specific sectors and stocks rather than broad-based buying.

Vijayakumar mentioned that FPI buying could continue in the near term as long as there is no sharp increase in US bond yields. India’s inclusion in the JP Morgan Bond Index is a positive development, with debt inflows for 2024 so far standing at Rs 68,674 crore. In the long term, this inclusion will lower borrowing costs for the government and reduce capital costs for companies, benefiting the economy and the equity market.

The main goal of including the bond index is to attract foreign investment into the Indian debt market rather than the equity market. Bhowar added that as foreign investors become more familiar with the Indian fixed-income market, they might explore other investment opportunities, opening up new avenues for growth and diversification, which is a positive sign for the future of FPI in India.

After the election results, FIIs’ focus will likely shift towards the budget and Q1FY25 earnings, which could determine the sustainability of FPI flows. While India will continue to be a preferred market for FPI flows, actual inflows may not be the highest among emerging markets due to occasional volatility and changing global investor sentiments.

So far this year, FIIs have net bought shares worth Rs 129,046 crore, while DIIs have bought shares worth Rs 236,325 crore. The long-term outlook remains positive, providing confidence about the stability of FPI flows in India, Bhowar added.

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