Foreign portfolio inflows into Indian stocks have surged to the second-highest level ever in December at Rs 57,313 crore so far as overseas investors bought domestic equities amid global headwinds.
Net overseas investments were the highest in a month after Rs 62,016 in December 2020, according to National Securities Depository Ltd.
The December spike came after the Bharatiya Janata Party secured majorities in the Hindi heartland states of Rajasthan, Madhya Pradesh, and Chhattisgarh, strengthening its position as the dominant force in north India ahead of the next general election. The U.S. Federal Reserve's signal to pivot to rate cuts next year further fuelled the rally.
According to a ICICI Direct Research note, 2023 saw resumption in FII flows as interest rate peaks and expectations of rate cut sets in. "Fresh flows were seen as market anticipated a halt and then gradual decline in interest rates."
Dollar index has started losing steam after U.S. Federal Reserve hit a pause button. "As a result, we expect dollar index to weaken further and capital flows should be seen into emerging markets," the brokerage said. "Historical evidences suggests that India should be the major beneficiary of these flows."
Foreign investors have bought Indian equities worth Rs 1,62,285 crore so far this year, also the second highest level ever.
December FPI inflows are also the highest among emerging markets, driving Indian stock benchmarks to record high. The Nifty 50 and the Sensex are up about 6% each so far.
"FPI inflows, which were negative in the previous three months, have sharply turned positive in December," VK Vijayakumar, chief investment strategist at Geojit Financial Services, said. "The steady decline in U.S. bond yields have caused this sudden change in the strategy of FPIs."
FPIs were big buyers in financial services. This explains the resilience of this segment in recent days, he said. Overseas investors also bought sectors like autos, capital goods and telecom.
"Since 2024 is expected to witness further declines in U.S. interest rates, FPIs are likely to increase their purchases in 2024 too."
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