FPIs stock up on Indian equities with record `1.4 lakh cr net inflow

New Delhi: Excess liquidity, attractive valuations and weakness in the US dollar propelled foreign investors to flock to the Indian stock market in a big way with the highest-ever net inflow of Rs 1.4 lakh core in 2020, but they also dumped debt securities worth a record amount amid pandemic-driven stress in the economy.

The foreign portfolio investors (FPIs) have made a net outflow of a little over Rs 1 lakh crore in 2020 so far, though hybrid instruments witnessed a net inflow of more than Rs 10,000 crore, as per the latest data available with depositories.

The market men expect a similar trend to continue for a few months unless there is a major change in the overall investment scenario.

"With some major developments on COVID-19 vaccine front, India stands to benefit. Also, growth in the economy will improve investor sentiments and their outlook towards India. From the risk-reward profile perspective, these aspects make India a good investment destination," said Himanshu Srivastava, Associate Director Manager Research, Morningstar India.

However, if the economy remains weak for a longer period of time, that could be a big deterrent. Also, if there is another wave of the coronavirus pandemic resulting in re-implementation of lockdown measures, that could dampen sentiments and turn foreign investors risk-averse, he added.

As the year 2020 draws to a close, the FPIs have so far made a net inflow of Rs 1.42 lakh crore -- the highest level of such investment in a calendar year since 2002.

This is the fifth time in history when net investment by foreign investors in equities has crossed Rs 1 lakh crore mark in a year. Prior to this, the feat was achieved in 2019, 2013, 2012 and 2010, when overseas investors infused a net sum of Rs 1.01 lakh crore, Rs 1.13 lakh crore, Rs 1.28 lakh crore and Rs 1.33 lakh crore respectively.

On the other hand, debt markets have seen FPIs turn net sellers in 2020 as they withdrew a massive amount of Rs 1.07 lakh crore from debt, however, they invested a net amount of Rs 23,350 crore in debt-VRR. The voluntary Retention Route (VRR) channel was introduced by the Reserve Bank of India (RBI) in March 2019 to attract long-term and stable FPI investments into debt markets.

Broadly, investments through this route are free of macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retaining a required minimum percentage of their investments in India for a certain period.

The year 2020 marked the biggest outflow by foreign investors from debt markets since 2002, when bifurcation of net investment data became available.

The previous record outflow was in 2013, when FPIs pulled out a net sum of Rs 50,849 crore from debt markets. Also, an exodus to the tune of Rs 47,795 crore was seen from such instruments in 2018.

Taking all asset classes together, FPIs have made a net investment of Rs 68,200 crore (USD 9.3 billion) in the Indian capital markets (equity, debt, debt-VRR and hybrid) so far in 2020, while a few days of trading is yet to take place.

While FPIs have made gross purchases worth Rs 20.7 lakh crore so far this year, they have sold securities worth Rs 20 lakh crore across all instruments.

In comparison, the net inflow into Indian capital markets was at Rs 1.36 lakh crore in 2019. This comprised a net investment of Rs 1.01 lakh crore in equities, Rs 25,880 crore in debt and around Rs 9,000 crore in hybrid securities.

Experts said availability of excess liquidity in the global financial market, attractive valuation compared to developed markets, and weakness in the US dollar have supported buying in Indian equities.

Nirali Shah, Senior Research Analyst at Samco Securities, said that 50 per cent of foreign inflows in India have been through qualified institutional placements (QIPs) and strategic stake sales such as the HUL-Glaxo deal and the remaining half have been through secondary market purchases.

A large factor for the massive inflows could be the weakening of the dollar which has caused a shift in money towards emerging countries given their interest rates are at the lower end and the inflation-adjusted return is much higher, she added.

According to Morningstar's Srivastava, one of the primary reasons for investment in equities is the availability of excess liquidity in the global financial markets with major central banks announcing stimulus packages to bring their economy back on track.