Foreign portfolio investors (FPIs) seem to show strong conviction in the Indian equity markets’ growth prospects going by their notable net inflows of ₹40,710 crore into equities during the first fortnight of March, data from depositories showed.

This robust inflows performance — highest so far this calendar year — was partly bolstered by their participation in huge bulk deals at the bourses this past week, particularly the one on March 14, say experts. It came even as the markets were spooked by the SEBI diktat on stress testing of mutual funds, leading to large scale selling and weakness in the small caps and some mid caps.

During the initial week of this month, FPIs recorded net investments of ₹11,823 crore in equities. In January 2024, they were net sellers, amounting to ₹25,744 crore, while their activity in February 2024 saw them as modest buyers, with net investments totalling ₹1,539 crore.

The increased FPI inflows this month coincide with the backdrop of a robust Q3 GDP growth rate of 8.4 per cent, which exceeded expectations and was announced on February 29. 

Meanwhile, FPIs continued to double down on the debt markets side too, pumping in ₹10,383 crore in the March 1-15 period. 

FPIs have so far this fiscal injected net investments of about $40 billion in equities, debt, hybrids, etc., and this is the highest inflows in a financial year since 2014-15.

K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said that the trend of rising foreign portfolio investments in India witnessed in the first week of March continued in the second week, too. 

He highlighted that an important feature of FPI investment for many months now has been its erratic nature. “FPIs have been changing their strategy in response to the changes in the bond yields in the US. Therefore, now that US bond yields have again spiked up in response to stubborn inflation, FPIs may again turn sellers in some of the days, going forward”, he said.

Vijayakumar noted that March has been seeing weakness in the mid- and small-caps and resilience in large-caps. This also has persuaded FPIs to reduce selling in large-caps and even buying in limited quantities in sectors like banking, telecom and automobiles, he added.

Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisors, said that international investors are increasingly gravitating to emerging market equities for higher growth, and the increase in Indian allocations is a reflection of this larger trend.

FPIs are building on their India conviction due to several factors, he said. These include robust Q3 GDP growth, likely strong earnings growth from Corporate India in CY2024 and analysts’ expectation of yet another win for the ruling political party, which could drive stocks even higher from here as international institutional investors seek political stability to develop medium- to long-term conviction in any market, Bhargava noted.

“Although India is an excellent macro play, earnings growth must continue on its current course for such FPI inflows to continue, as India’s stock valuations remain relatively high in comparison to other promising countries”, Bhargava said. 

He also noted that FPIs may be encouraged by the analysts’ expectation of a shift in RBI policy with rate decreases of 25-50 basis points in the second half of fiscal year 2024-25.

“FPIs perhaps think that the opportunity set has expanded beyond merely call centres and IT support, and they want to engage in this broader opportunity”, Bhargava said.

Meanwhile, all eyes are on the US Federal Reserve as its Federal Open Markets Committee (FOMC) will begin its two-day policy meeting on March 19. Street would be keenly watching for comments on when the interest rate cuts are likely to commence in the US.