Foreign flows into Indian markets are being drained out even as the economy opens on the back of a decreasing virus load and strengthening nationwide vaccination drive. Neither action-packed primary markets nor regulatory clampdowns in China have been able to attract foreign institutional investors (FIIs) to Indian shares any more.

FII inflows into Indian equities have been slowing down with an outflow of $800 million since July. Last month, FIIs were net sellers of Indian equities worth $1.7 billion, while they have bought $905 million in August so far, compared to a robust inflow of $7.32 billion in first three months of this year. FII net inflow into equities in 2021 is $7.28 billion against $23.37 billion last year.

“The Indian market has seen FII outflows over the past two months despite inflows in the primary market. In fact, secondary market outflows have been quite large over the past six months. This would suggest that China’s woes have not benefited India in any form and probably impacted overall EM (emerging market) sentiment and flows,” said Kotak Institutional Equities.

According to the brokerage firm, the net outflow of FII money from India is a “bit surprising” in the context of general bullishness in the market and China’s woes and collapse in market capitalization of its large technology companies.

“Valuations of the Indian market look full and are supported by expectations of strong earnings growth over FY2021-23 and stable-to-modestly higher interest rates/bond yields over the next few months; yield gap is still reasonable. We see negative risks to both the ‘supports’ but not enough to call time on the market,” Kotak Institutional Equities added.

The Indian market has outperformed emerging peers in 2021 so far, while scoring new highs multiple times, supported by a combination of favourable factors.

In this year so far, market benchmark indices Sensex and Nifty have risen 17-19%, while MSCI EM is down 1% and MSCI World is up 16.20%.

So far in August, the Sensex and Nifty are up nearly 6%, significantly higher than the 2% rise in MSCI World, while MSCI EM is down 0.2%.

Analysts at Credit Suisse Wealth Management continue to say that FIIs may not desert Indian equities as India’s structural outlook has improved materially, and it offers one of the fastest growth among major economies.

However, they feel that near-term indicators are looking a little stretched for equities, while the medium-term outlook for Indian equities remains attractive.

“We expect some minor underperformance by Indian equities given stretched valuation. Nevertheless, we expect Indian equities to continue to command better valuation premium compared to EM peers,” said Jitendra Gohil, head, India equity research; and Premal Kamdar, equity research analyst at Credit Suisse Wealth Management.

FIIs started withdrawing from emerging markets such as India on fears of the US Federal Reserve tightening its monetary policy stance.

The latest Federal Open Market Committee (FOMC) meeting minutes suggest the increase of the likelihood of tapering of asset purchases in 2021.

Loose monetary policy by global central banks have led to massive liquidity inflows into equities following the covid-19 outbreak.

Christopher Wood, global head of equity strategy, Jefferies, said in his latest Greed and Fear note that sooner-than-expected rate taper by the Fed may cause some jitters in the risk-on trade in equities, and give a reason for treasury bond yields to move higher.

Investors will be keenly watching US Federal Reserve chairman Jerome Powell’s speech at Jackson Hole, which will offer a guidance on when and how the Fed will scale back its emergency support.

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