After all, fresh foreign purchases will be key to revival of the stock market that has slid in the past two weeks after hitting all-time highs in mid-September. But with the surge in global oil prices, US bonds yields and the dollar contributing to fresh risk aversion in emerging markets, including India, brokers and strategists say the mood of the foreign investors remains cautious.
Past 10 years’ foreign fund flow trends of October offer little direction. While these investors have been buyers on five occasions, they were sellers on five,too. Statistically, going by the past trends, odds of inflows or outflows this October are even but few are willing to stick their necks out and bet on a fund flow revival amid macro-economic challenges.
“FPI inflows have been volatile given headwinds such as monsoon deficit in India, higher US Fed rates and crude oil prices going up,” said Amnish Aggarwal, head of institutional research at brokerage Prabhudas Lilladher. “While it is difficult to predict the trends, the market rally of the past few months had a fair bit of contribution from strong FPI inflows.”
Foreign investors have been buyers of Indian equities from March to August worth a total of almost ₹1,70,000 crore. Though FPIs were buyers – albeit moderate – in the early part of September, driving the Nifty to its record high of 20,222.45 on September 15, the market shed gains after flows reversed.
Yields on benchmark 10-year US bonds are at 4.6%, the highest since 2007, while the Dollar Index has risen 2.26% in the past month and 3.38% in three months.
“The recent hikes in the 10-year yields of US bonds along with the appreciating dollar has led to emerging markets’ currencies depreciating,” said Nischal Maheshwari, CEO-institutional equities at Centrum Broking. “When dollar appreciates, it makes more sense to invest in the US economy.”A weakening local currency results in an erosion in the value of foreign investors’ holdings in that country. The rise in bond yields and the dollar have been mainly on account of waning expectations that the US Federal Reserve would cut interest rates soon with inflation remaining sticky.
The surge in crude prices to almost $95 a barrel contributed to expectations of continued inflationary pressures. “The dollar index moving above 105 and the sharp rise in US bond yields are not favourable for capital flows to India in the near-term,” said VK Vijaykumar, chief investment strategist, Geojit Financial Services.
Rich valuations of Indian stocks could have also prompted foreigners to pull some money out of India. The current valuations of the Nifty are 20.16 times FY24 Price to Earnings (PE), which is high considering that the long-term valuations are at 17.5 times, said Vijaykumar.
“The hawkish stance of the Fed will lead to higher rates and the valuations are already high as per historical valuations,” he said.
The recent spike in oil prices has dimmed the optimism around India of late as it imports more that 80% of the crude it requires. Higher oil imports results in the current account deficit (CAD) idening and the rupee weakening.
“The rise in crude prices is likely to lead to an increase in prices of the energy basket and result in higher inflation,” said Aggarwal. “It can have adverse impacts on the current account deficit.” Maheshwari expects a ‘sideways correction’ in the market to continue.