FPIs make U-turn to  Indian  markets as covid cases fall

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Strong fundamentals, an upbeat policy environment, and stronger- than-expected economic recovery resulted in net inflows of foreign portfolio investment (FPI) worth 2.74 trillion into India in FY21. FPIs turned net sellers in April, but the tide has turned again. Mint explores:

What is foreign portfolio investment?

In June 2014, the Securities and Exchange Board of India enacted simplified uniform guidelines and grouped foreign institutional investors (FIIs), sub accounts, and qualified foreign investors (QFIs) into a new investor class called foreign portfolio investors. These investors hold securities and financial assets through foreign financial institutions. Since 1995, foreign individuals keen to invest in Indian markets were required to register themselves as sub accounts of FIIs and the FIIs would purchase shares/bonds on their behalf. In 2002, QFIs were introduced allowing investments via demat accounts.

How does FPI flow impact markets?

Before investments by FIIs in Indian markets were approved in 1995, market trends were influenced by domestic institutional investors (DIIs) such as Life Insurance Corporation of India and UTI. But since the mid-1990s, by and large, foreign investors have become the major players. When foreign investors become net sellers, the stock market crashes and vice versa depending on the volume of inflow or withdrawal from the market. In a scenario of FIIs/FPIs being net investors, the market sentiment becomes positive, resulting in more institutional and retail investors willing to invest.

On the rise

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On the rise

How does the US Federal Reserve influence FPIs?

Foreign portfolio investors invest in search of better returns in host markets compared to their home market. Hence, US Federal Reserve policy rates influence FPI movement in other markets. A fall in the federal rate leads to increase in FPI inflow in emerging markets such as India which offer higher returns and vice versa.

What is the trend in flow of FPI?

FIIs/FPIs have since mid-1990s largely been net investors in the Indian equity market with the exception of a couple of years such as 2008-09, which was the year of the global financial crisis. But with regard to debt securities, FPIs have been net sellers, preferring to park their money in safer investment options such as gold or dollars, as against the fixed income securities of emerging economies. For the fortnight ending 31 May, FPIs have largely invested in banking, utilities, auto, metals and mining, and the consumer durables sectors.

What does inward flow of FPI indicate?

Confidence in the fundamentals of Indian economy, backed by a positive policy environment, ample liquidity in the global financial system, attractive valuations, and a relatively weak dollar resulted in net positive FPI inflows in 2020. Third and fourth quarters of FY21 saw positive corporate earnings along with structural policy changes for improving ease of doing business. With covid cases falling, India saw net FPI inflow of 15,626 crore from 1 to 14 June.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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