$1 billion-weekly bill! 5 reasons why Indian stocks are irresistible to FIIs

With the Indian economy being in a sweet spot, foreign institutional investors or FIIs have succumbed to the temptation of Indian stocks by splurging over $16 billion in the first 16 weeks of FY24.

In recent months, India has been the largest recipient of FII inflows among all emerging market economies as the recent underperformance of Indian equities relative to peers amid strong earnings delivery had turned valuations more reasonable.

India's above average valuation premiums, both absolute and relative to peers, is now being counterbalanced by strong domestic growth and resilient earnings growth expectations.


“There has been a sharp risk-on rally globally on the back of macro data flows which suggests that growth and inflation is slowing down sharply. This will allow the US Fed some elbow room in the second half of the year,” said Manish Jeloka of Sanctum Wealth.

Top 5 factors making FIIs pump hefty amounts in Indian stocks:

1) China Vs India
If the single biggest reason for the summer rally of 2023 is FII flow, then probably the single biggest trigger for the flood of FII money is the U-turn in FII strategy from ‘Sell India, Buy China’ during January and February this year to ‘Buy India, Sell China’ during the last three months.

“The initial enthusiasm triggered by China’s post-Covid opening up in early 2023 has not been sustained. Chinese macros and demographics indicate a sharply slowing Chinese economy and declining prospects for investment in China. Furthermore, India is now regarded by foreign investors as a major long-term beneficiary of the China Plus One policy pursued by the developed world, particularly the US. It is this changed perception of India vis-à-vis China that has triggered massive FPI flows into India,” said Dr VK Vijayakumar of Geojit Financial Services.

2) Fed factor
Wile the US Fed has indicated that they are likely to hike the Fed rates by 50 bps from current levels and hold them at higher levels till the end of the year, the market is hoping that the continued fall in inflation rate along with weakness in labor markets will provide the central bank with headroom to cut rates earlier than what they have indicated.

“The market is expecting 1 or 2 further 25 bps rate hikes but the directional expectation is that the Fed would take a pause and then a rate cut in CY24. This has triggered asset allocation globally with flows reversing from developed markets to developing markets,” said Ritesh Bhagwati, Vice President, Rockstud Capital.

3) Earnings outlook
After growing 11% in FY23, Bloomberg consensus earnings growth expectations for Nifty for FY 2024 and FY 2025 stands at 17% and 16%, respectively.

“Overall earnings growth is likely to be driven once again by domestic Cyclicals such as BFSI and Auto, which are expected to post 47% and 11x YoY jumps while Consumer and IT are likely to report a healthy 19% and 16% YoY growth, respectively,” said Siddhartha Khemka of Motilal Oswal, adding that a part of this year’s rally is also a reflection of the market pre-empting CY24 events.

4) Declining dollar
The decline in the dollar index to below 100 on Friday, the lowest level in one year, is another factor sustaining FII flows on Dalal Street.

5) The big picture
Economists expect India’s growth to track above its long-term trend and stay ahead of its major peers in 2023. "Supportive government policies, a sustained revival in services and a pick-up in private capex are tailwinds for growth. Further, a likely peak in RBI’s policy rate could drive a pick-up in consumption demand," Standard Chartered said, adding that fiscal policy remains the key driver for growth in 2023.

Analysts also point out that India is becoming ‘too big to ignore' by virtue of the size of the economy, the size of the market, and its weight in emerging market indices, which has doubled in the last 8 years.

What’s in store now?
Even as FII flows into India are continuing unabated, analysts have expressed concern over the rising valuations which are getting stretched. “The valuations in China (PE is 9) is hugely attractive now compared to valuations in India (PE is around 20) and, therefore, the ‘Sell China, Buy India’ policy of FPIs cannot continue for long,” said Dr Vijayakumar.

As Sensex, Nifty are at new all-time highs, above-fair valuations and the competing market narratives, analysts say investors should be prepared for episodes of heightened volatility.

Standard Chartered has advised investors to adopt a barbell-like sector strategy within equities by having exposure to domestic cyclicals (financials and industrials), while adding a defensive tilt through exposure to healthcare.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)