Alternative Investment

First stocks, now bonds: Why foreign investors are snapping up Indian securities

Indian stock market index Nifty closed at a 7-month high while Indian government bond yields declined to about 5-month lows, as foreign investors step up purchases of Indian securities. Bond prices and yields are inversely related. The benchmark 10-year government bond yield ended at 7.1077%, lowest since April 27. Bond investors have been on a buying spree ever since analysts started betting on local notes likely being included in global indexes. 

The RBI had removed foreign investment caps for a number of securities under the ‘fully accessible route’ (FAR) in April 2020 to help meet a key requirement of index providers.

Foreign investors have bought bonds worth nearly 6600 crore Indian rupees ($834.60 million) in this category in six weeks to Sep. 9, even as they sold 1800 crore of other government securities on a net basis.

Nifty 50 stock index today ended up 0.75% at 18,070, its highest closing level since mid-January. Meanwhile, persistent foreign investor purchases and weak oil prices aided gains in local stocks, analysts said.

“What is adding to the fizz has been the return of the FIIs (foreign institutional investors) into local shares over the past month or so and the falling U.S. dollar index,” said Shrikant Chouhan, head of equity research (retail) at Kotak Securities.

Goldman Sachs had said last month it expects an inclusion of Indian bonds in global indexes this year. Morgan Stanley said in September it saw a good chance that JPMorgan will announce the inclusion soon. While Goldman Sachs expects an overall inflow of around $30 billion from an inclusion in the J.P. Morgan Emerging Market Bond index, Barclays has estimated around $25 billion.

Barclays also expects another $8 billion to $20 billion from a possible inclusion in the Bloomberg Global Aggregate bond index.

Foreigners are returning to Indian stocks after dumping them in the first half as they look for higher returns amid expectations that major central banks will slow their hiking cycles as price pressures ease. Foreigners have invested about $7 billion in Indian equities since the start of July, after dumping over $27 billion-worth over the previous six months.

Hitesh Jain of YES SECURITIES lists out several factors that prompted the resumption of FII inflows in Indian equities.

-Relatively lower inflation in India vs US, UK and Europe
-7% GDP growth better than the pace in any other major economy
-FII’s under-ownership of Indian Equities when compared with the historical levels
-Exodus of investments from Russia is finding an alternative in India
-Funds looking at diversifying investments away from China
-India’s thrust of manufacturing and rebound in industrial output is drawing investments in Capital Goods
-FIIs are now pouring money in Domestic facing sectors like Banks and Consumption stocks which are immune to global shocks and traction is apparent in terms of India’s credit growth and consumer spending

“We are also seeing how FIIs have come back strongly. Even the volume in the market has improved significantly. India Inc’s earnings and their commentary continue to make us believe that India is on a growth path. We are confident the market will continue to do well as levers for growth continue. India’s PLI scheme, China plus one strategy, India as among the fastest growing economies in the world and inflation continuing to remain soft are all indicators that the market should do well. India is in a very sweet spot where growth would be high and inflation low. These two combined are rare to find in a volatile world economy. No fund manager can afford to ignore this,” said Sunil Damania, Chief Investment Officer at MarketsMojo. (With Agency Inputs)





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