What will bring foreign investors back to Indian stock market? 5 things that should go right

After buying Indian equities in July and August, foreign portfolio investors turned heavy sellers in September as crude oil rose, US bond yields surged and the rupee weakened. FPIs sold over Rs 25,000 crore of Indian shares in September, the highest monthly outflow in six months, as higher oil prices and elevated bond yields hurt the appeal of Indian assets.

Analysts say FPI selling was even sharper on a broader equity-flow basis. They turned heavy sellers in September with total equity selling of Rs 45,536 crore.

In this context, here are 5 things that analysts think should go right for a foreign investors comeback


1) Cooling of US bond yields

The US 10-year Treasury yield climbed to 5.34% last week, its highest level since 2002, after a global bond sell-off. A yield above 5% gives global investors a high return in a dollar asset seen as safer than emerging-market equities. The higher the US yield goes, the harder it becomes for India to compete for foreign capital.

VK Vijayakumar of Geojit Financial said the surge in the US 10-year yield above 5.2% was one of the main reasons behind renewed FPI selling. A decline in yields would be the clearest signal for foreign money to reconsider emerging markets.

2) Crude must cool

Oil is the second trigger. Elevated crude prices hurt India more than many peers because the country imports most of its oil requirement. Higher crude widens the import bill, increases inflation risk and puts pressure on the rupee.

Rising crude prices strained India’s current account and inflation expectations, weighing on the currency and foreign flows.

Gaur of Choice Broking called oil, US yields and the rupee "an unpleasant cocktail" for foreign investors. If Brent retreats meaningfully, India’s macro picture starts looking less vulnerable.

3) The rupee must stabilise

Foreign investors do not only look at stock returns. They look at dollar returns. A falling rupee can wipe out part of the gains made in Indian equities. The rupee recently dropped to a two-month low as global bond yields rose and oil prices jumped, adding to pressure from foreign outflows.

A stable rupee would reduce currency risk and make Indian equities easier to own. The next cue will come from the RBI’s October policy. A Reuters poll showed most economists expected a 25-basis-point rate hike to 5.50% at the October 5-7 meeting as inflation broadened and rupee pressure increased.

4) Q2 earnings must defend valuations

There is agreement among analysts that makes second quarter earnings hold key. Vijayakumar said companies that report good numbers along with positive management commentary are likely to attract buying. The market will look for revenue growth, margin stability and guidance that shows demand has not weakened.

Large-cap valuations have become more attractive after the correction, but earnings must justify the price.

5) Foreigners need a reason to rotate back

Part of the outflow is also portfolio rotation. FPIs have also shifted capital towards AI-heavy markets such as South Korea and Taiwan, adding to pressure on Indian equities. For money to return, India needs to show a better risk-reward than those trades. That could come through cheaper large caps, stronger bank earnings, resilient consumption or strong IPO listings. Domestic institutional investors have already cushioned the fall.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here.