An analysis of the highest ever FPI stock investment flows in 2023 and associated outlook across industries going forward.
Source and Citation: Article from ET Bureau published on Dec 30, 2023, originally titled “At Rs1,74,663 cr, D-Street Records Highest Foreign Inflows in 2023”
Analysis of this news for a layman
Foreign Portfolio Investors (FPIs), representing large global equity investors, have made record investments of nearly Rs 1.75 lakh crores in the Indian stock markets in 2023, according to data.
This marks the highest-ever annual inflow from FPIs, surpassing even the previous highs seen in 2020. Last year, FPIs were significant sellers, divesting Rs 1.25 lakh crores of investments, while this year, they have been substantial buyers.
This substantial inflow reflects growing confidence in India’s economic growth prospects, especially in comparison to the global economic slowdown. Factors such as the possibility of softening US interest rates and the potential continuation of reformist policies if the BJP wins the 2024 elections have contributed to this positive sentiment.
However, some analysts point out that the high valuations of Indian stocks could act as a deterrent to similar future inflows from FPIs. Nevertheless, India’s stable domestic growth drivers suggest that foreign investments will likely continue to chase the market’s upside potential, albeit at a moderated pace.
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Impact on Retail Investors
For Indian retail equity investors, the trend of record FPI inflows in 2023 has several implications:
Positives:
- It reflects global investor confidence in India’s growth potential, despite the risks of a global economic slowdown. This positive sentiment can benefit retail investors as well.
- High FPI interest in IPOs (Initial Public Offerings) and follow-on offers by companies supports the primary market, ensuring the ability of Indian companies to raise funds.
- A stronger rupee, resulting from heavy capital inflows, can be beneficial in the near term, especially for import-dependent sectors.
Negatives:
- There remains a risk of sudden outflows if global recession risks increase, especially in the US. This warrants caution for retail investors, who should avoid stocks primarily held up by foreign flows at stretched valuations. Chasing momentum carries risks.
While the convenience and potential cost savings are promising for the future, it’s essential for retail investors to proceed cautiously and make informed decisions.
Impact on Industries
Several Indian industries will witness impacts from the trend of strong FPI inflows:
Banking & Financial Services:
Stability in forex and debt capital markets, aided by FPI inflows, supports lending and investment activity, benefiting leading banks and Non-Banking Financial Companies (NBFCs).
Information Technology:
This sector is a key recipient of FPI flows, given global investor familiarity. However, the sector’s growth will depend on currency movements and global demand.
Pharmaceuticals:
The pharmaceutical sector benefits from risk-off investor preferences during global turmoil, as it is considered a defensive sector. Companies like Sun Pharma and Dr. Reddy’s stand to gain.
However, further sustained upside for export-linked sectors may be limited due to currency appreciation pressures resulting from rising fund inflows.
Long Term Benefits & Negatives
The long-term economic impact of rising FPI equity investments in India includes several positives:
Positives:
- It affirms India’s appeal and potential among the global investor community, aiding macroeconomic stability and the growth environment.
- The strengthening of the currency account allows a focus on export competitiveness, aligning policies with “Make in India” priorities.
- It raises governance and transparency standards for domestic companies seeking global investments, aligning them with international norms.
However, risks necessitate a calibrated response:
- There’s a risk of hot money outflows if sentiments reverse on global cues, potentially causing growth momentum to derail.
- Currency appreciation risks hindering export competitiveness, affecting the current account situation in the long term, necessitating vigilance by the Reserve Bank of India (RBI).
- Excessive liquidity from FPI inflows can lead to inflation risks or asset bubbles in equities and real estate, requiring careful monitoring by monetary authorities to prevent overheating.
In conclusion, while celebrating this trend, a measured and prudent strategy is warranted to avoid extreme euphoria or risk-aversion. Global economic shifts may impact capital flows, so an eye on external factors is essential.
Short Term Benefits & Negatives
In the short term (starting in 2023), the rising trend of FPI equity investments is expected to have several impacts:
Positives:
- Reduced pressure on the rupee allows it to appreciate, keeping import bills, including energy costs, benign for now.
- The IPO and equity issuance pipeline is aided by FPI interest, allowing private capital expenditure (capex) revival funding without crowding out. This has a positive multiplier effect on short-term growth.
Negatives:
- There is a risk of currency appreciation not anchored to real productivity gains, which could harm export competitiveness. The RBI must vigilantly manage the risks of excessive currency appreciation.
- Excess liquidity from FPI inflows may lead to inflationary pressures or asset bubbles in equities and real estate. The RBI must closely monitor the situation and adjust policies as needed.
In the short term, a careful balance must be maintained to ensure that FPI inflows translate into real economic gains while avoiding the risks associated with excess liquidity and currency appreciation.