The historic rise of the Indian stock market owes a great deal to foreign investors. Over the last two decades, foreign portfolio investors (FPIs/FIIs) have not just increased their stake in Indian equities, but have also become a key player in determining the market direction.
FIIs have been investing in Indian markets since 1993. However, their participation became more pronounced only in 1999.
Net investment
In 1999, foreign investors made a net investment of ₹ 6,578 crore in Indian equities against an outflow of ₹163 crore in the previous year. Incidentally, the benchmark BSE Sensex hit the 5,000-mark in October the same year. Since then, the quantum of FPI investment in Indian equities have gone up by leaps and bounds.
Sample this: the benchmark Sensex touched the 20,000 mark in October 2007, growing by 300 per cent since October 1999. On the other hand, FPI investment in Indian equities grew by 987 per cent to touch ₹ 71,487 crore during the same period.
Even the current market rally, which pushed the Sensex to touch an all-time high of 50,000 points on Thursday, is primarily on account of massive inflow of FPI investment, backed by the liquidity expansion measures of major central banks.
“Even though the Sensex has rallied to 50,000 level, when you compare the valuations and growth prospects of emerging markets, the Indian market still looks very attractive to overseas investors. The market looks strong at 50,000 levels also,” said Kranthi Bathini, equity strategist at WealthMills Securities.
In CY2020, Indian equities received a record FPI inflow of ₹ 1.70-lakh crore, of which, 83 per cent or ₹ 1.42-lakh crore came in the last three months of 2020. In the current calendar year, FPIs have already pumped a net investment of ₹ 22,730 crore in just 15 trading sessions.
But the record FPI inflow also carries the overhanging risk of sharp market fall when FPIs pull out a large sum of their investment. For instance, in March 2020, FPIs pulled out a record ₹61,973 crore from equities, creating one of the worst crashes in the Indian stock market history.
Tax surcharge
Similarly, in July and August 2019, FPIs pulled out over ₹ 30,000 crore from Indian equities when the Finance Minister introduced a tax surcharge on the super-rich investors in the Budget in July 2019. The government had to subsequently roll back the surcharge to arrest the FPI sell-off.
“FIIs consider multiple factors while making investments. Apart from growth and earnings prospects, the differential returns and stable currency environment are also important to them,” said Joseph Thomas, Head of Research, Emkay Wealth Management.
“Budget is something which all investors are looking forward to. The reform-orientation of the Budget, its accent on infrastructure and other key sectors and, more importantly, the fiscal glide are factors that will determine the sustained commitment of not only domestic but also overseas investors,” he added.