Foreign Institutional Investors (FIIs) have been net buyers for about 19 sessions, pouring in 46,003.66 crore into the Indian stock market recently. In the context of the US-China trade agreement, investors are analyzing whether foreign institutional investments in India will remain stable in the near future.
On Monday, the US and China reached an unexpected agreement to significantly reduce tariffs on each other’s products for an initial period of 90 days, resulting in a decrease in tensions related to their ongoing trade conflict and positively impacting global markets.
Following this, strategists at Nomura Holdings Inc. have revised their outlook for Chinese stocks to a ‘tactical overweight,’ noting that the trade truce between the US and China is a major benefit for equities in the Asian country. Consequently, the D-Street anticipates that funds will shift toward Chinese stocks shortly.
In the first quarter of this year, FIIs were consistent sellers in India. Significant selling commenced in January ( ₹78,027 crores) when the dollar index reached its peak of 111 in mid-January. Following this, the pace of selling began to ease. FIIs shifted to buying in April, with a total purchase of ₹4,243 crores. Both global and domestic factors have been driving the increase in FII inflows into Indian equities.
“Capital flows, whether domestic or foreign, play a vital role in shaping the direction and health of the capital markets. Still we see FII are market movers, despite rise in domestic participation, FII flows continue to carry weight, especially in large-cap segments and index movements,” said Prashanth Tapse, Research Analyst, Senior Vice President of Research at Mehta Equities.
Will FII inflows remain sustainable in the near-term?
Analysts observe that global markets are currently experiencing volatility, fluctuating in response to constantly shifting policy developments.
The impact of Trump’s reciprocal tariff strategy, which previously created disruptions in the markets, seems to be over, with a new agreement reached between the US and China. It appears that the trend of a declining dollar has come to an end, and the yield on US 10-year bonds has surged to 4.47%, which may affect FII investments in India that have been supporting the resilience of the Indian market.
Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited said that the recent sustained FII inflows into India is unlikely to sustain in the context of the deal between US and China. The macro construct of weakening dollar and potential slump in US and Chinese GDP growth has been altered by the new developments. However, the strong domestic inflows into the market and the improving prospects for three more rate cuts by the MPC due to low inflation will keep the Indian market resilient. FIIs may not turn aggressive sellers in India in such a scenario.
Key elements that FIIs consider prior to investing in emerging markets
According to Prashanth Tapse, FIIs often invest based on many factors, valuations being the most important one but they are more reactive to global cues like Interest Rate Movements (especially US Fed policy), Dollar index movement as a stronger dollar typically leads to capital outflows from EMs like India, Geopolitical tensions, and volatility in Bullion & Commodity prices.
“The Indian equity market has matured significantly in the last decade, and while FII flows remain important, they are no longer the dominant force they once were, added Tapse.
Further, talking about the rise of Domestic Institutional Investors (DIIs) — particularly mutual funds, insurance companies, and pension funds — along with a growing base of retail investors, Prashanth believes that it has brought a major shift in market dynamics.
“Structural strength of ‘New India’ monthly SIPs has been a game changer in the last 2-3 years hitting record highs over ₹25,000 crore/month. This domestic liquidity flow can be a predictable and resilient source of funding for the equity markets, even during global uncertainty,” explained Tapse.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.
