With the global financial system still flush with liquidity, emerging market assets, especially equities, might well remain the preferred investment avenue for many more months to come, experts opined.
Waves of foreign portfolio investments worth over Rs 51,000 crore splashed into the Indian market in 2021 as overseas investors turned net buyers of domestic securities for the third straight year while excess global liquidity and other factors steered the ebb and flow of their investing ways.
With the global financial system still flush with liquidity, emerging market assets, especially equities, might well remain the preferred investment avenue for many more months to come, experts opined.
As the equities sizzled during most of 2021, that also saw economy slowly coming back into the recovery path, Foreign Portfolio Investors (FPIs) turned net buyers but their investment is much less compared to net inflows of Rs 1.03 lakh crore in 2020. And last year's quantum was lower than Rs 1.35 lakh crore investments made by them in 2019.
Mirroring the roller-coaster ride for foreign portfolio investment flows in the Indian market this year, FPIs emerged as net buyers for six months, including three months continuously starting from January. In June, August and September also, these investors made net investments and the remaining six months witnessed net FPI outflows.
Excess liquidity in the global financial system, resurgence of concerns over the coronavirus pandemic, rising global inflation as well as higher valuation of Indian equity markets are among the mix of factors that influenced FPIs.
Data with the depositories showed that overseas investors pumped in Rs 26,001 crore into equities, Rs 23,222 crore into debt segment and Rs 1,848 crore in hybrid instruments.
This took the total net inflow between January and December 28, 2021 to Rs 51,068 crore.
About the relatively lower FPI inflows this year, Milind Muchhala, Executive Director at Julius Baer, cited strengthening of the dollar index, outflows from various emerging markets, including India, and profit-booking on account of the country being a large outperformer in comparison to other emerging markets till the end of September quarter, as the key factors.
Himanshu Srivastava, Associate Director - Manager Research at Morningstar India, said FPI flows were driven by excess liquidity in the global financial system on the back of stimulus measures announced by central banks and resurgence of the pandemic.
He also mentioned that surging global inflation, US Federal Reserve signalling reversing of pandemic stimulus programmes earlier than expected, higher valuation of Indian equity markets and emergence of the Omicron variant impacted FPI flows at different points in time during 2021.
Foreign fund flows into the domestic market was quite robust in the first three months of this year on the back of multiple factors, including the government's pro-growth Budget, decline in coronavirus cases, launch of COVID vaccine and improvement in economic numbers.
Srivastava noted that the gush of liquidity in the global financial markets after the US announced a $1.9 trillion pandemic relief package and a rejig in some of the global indexes resulted in fund flows into Indian equities.
However, the sharp surge in COVID cases in the subsequent months spooked foreign investors.
Reversing the bearish trend, FPI interest in Indian equities revived and they came back to invest in June after two previous months of net outflows.
Compared to an upbeat mood in June, FPIs turned cautious at the start of the September with US Federal Reserve's hawkish statement that it might raise interest rates much earlier than planned.
"Besides, rising valuations, surge in oil prices and firmness in US dollar made them wary of the near-term risks. Additionally, lower chances of further rate cuts on the back of global inflation and rising dollar also added to the outflows," Srivastava said.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that FPIs have turned negative on India since October 2021 and many foreign brokerages downgraded India from overweight to neutral and resorted to sustained selling.
Notably, even though FPIs were sellers in the secondary market, "they have been buying consistently in the primary market with a buy figure of Rs 78,994 in calender year 2021 till December 20th. Investing as anchor investors in IPOs and selling when the lock-in ends has been rewarding for FPIs except in Paytm," he said.
So far this year, the benchmark 30-share Sensex has gained more than 21 per cent, a reflection of persisting bullish trend in the domestic equities space.
In December, FPI flows across emerging markets were mixed, with South Korea, Philippines, Thailand and Indonesia, witnessing inflows to the tune of $2,443 million, $1,711 million, $190 million, and $55 million, respectively, while Taiwan witnessed outflow of $15 million, according to Shrikant Chouhan, Head - Equity Research (Retail) at Kotak Securities.
Sanjiv Bajaj, Joint Chairman and Managing Director of Bajaj Capital, said that while the long term outlook for the Indian equities looks bright and has a promising scenario in the years to come, the short to medium term volatility may not be ruled out in 2022.
According to experts, markets like India, with relatively higher economic growth could attract more foreign investment.