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Covid-19 opened the floodgates for Foreign flows in to India’s equity market in 2020. Do these Foreign inflows will continue in 2021?
Foreign inflows into Indian stocks hits record 27 years high. What are the reasons behind the persistent surge in foreign fund inflows in 2020?
The year 2020 has seen the worldwide economic down trend triggered by the Covid-19 virus, however it also opened the floodgates for investments in the domestic equity market. In the later part of the year, not only did the overall capitalisation of India’s domestic market increased, the country’s key indices emerged among the best performing emerging markets (EMs).
Initially, the lockdown induced crash led to attractive valuations along with a global flood of liquidity and near zero interest rates in foreign markets. As a result, return on investment from several asset classes except equities vaporised.
Investors jumped from one assets class to the other, till the time even the US dollar became unviable due to the massive stimulus package. Accordingly, the funneling of such funds into the emerging markets led to a net investment of over $22 billion into India’s market till now in CY2020.
Abundant liquidity in the global financial system due to massive easing by major central banks as well as expectations of fiscal stimulus in the US resulted in hefty foreign fund inflows into emerging market assets, including in India.
Besides foreign funds, the domestic lockdown, the biggest in the world, flooded the stock markets with over 60 lakh new retail investors.
Additionally, a considerable number enrolled through various schemes via the MF segment. Market watchers contend that these newbie investors saw the value in stocks beyond the pandemic induced slowdown and became the real beneficiaries of the up move.
Till now in 2020, Indian markets witnessed FPI inflows of $22,281 million, which is 55 per cent higher than the flows in the entire 2019 in USD terms.
However, the domestic MF houses pulled out over Rs 33,000 crore till November 2020.
In terms of purchase, FPIs initially preferred large cap stocks till October. Later on, they enlarged their purchases to include the mid and small cap segments.
Sectorally, IT, pharma, banks, FMCG, metals, realty and oil & gas stocks were bought the most by FPIs in this year.
Apart from very high FPI inflows in 2020, large number of new investor registrations due to the Covid-19 pandemic has also contributed to the uprun in the market.
What can be expected for the year 2021?
The reducing graph of Covid-19 case count, the availability of the vaccine in sight, fear of valuations may go even higher and economic return to the growth trajectory are expected to potentially fuel more development in the emerging markets such as India.
While we are not completely out of woods yet, with concerted human efforts, global and domestic economic landscape has shown clear signs of improvement and clarity has emerged on multiple fronts.
Ending the year 2020, the Indian equities have entered a bull market environment. If this trend continues, then the market view is that the Nifty may cross 15,000 mark in 2021 with continuing foreign funds. While the markets all set to enter 2021 at all-time high, investors should keep a close check on the corporate earning recovery along with other economic factors such as actual inflation trajectory, related RBI monetary policy action and exit strategy from current monetary conditions.
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