The £5.12 billion net buying of Indian stocks by foreign funds in August, a 20-month high figure, has convincingly reversed a nine month continuous selling by these institutions. But flow-related volatility could continue for a while, brokers said.
A report by ICICI Securities pointed out that the US was still in a ‘quantitative tightening’ cycle that began in 2021 and the same was responsible for the huge net outflow by foreign portfolio investors (FPIs) between October 2021 and June 2022. During that phase, FPIs had taken out around $33 billion from the Indian market, one of the sharpest in the country’s history.
Analysts at ICICI Securities believe that the record outflow was mainly in anticipation of an extreme quantitative tightening. However, a similar outflow may not occur again. “We continue to be in a quantitative tightening cycle which will result in bouts of volatility from FPIs, although the phase of ‘unprecedented relentless selling’ seems to be behind us,” the report said. “The trajectory of inflation going ahead in the US will be a key determinant of FPI flows in general towards emerging markets, including India,” it added.
The short-term view among brokers, relating to the direction of FPI flows, however, is a bit confusing. On the one hand, the strength of the dollar against other currencies could prompt foreign fund managers to take money out of emerging markets. On the other, the view is that inflation in the US has peaked and, as this starts moderating, FPIs would buy Indian assets (stocks, bonds and hybrid products) again.