The US Fed rate cut effect: Foreign investors splurge on Indian shares on Day 2

Foreign investors upped the ante in Indian markets on the second day after the US Federal Reserve’s larger-than-expected interest rate cut, catapulting the benchmark Nifty 50 and Sensex indices to fresh highs.

To be sure, part of the ₹14,000 crore provisional buying by foreign institutional investors on Friday was due to index provider FTSE’s semi-annual rebalancing of its prestigious All-World Index. The rest was driven by active buying due to the US rate cut, which is expected to result in higher capital flows into emerging markets like India.

Investors turned richer by $7 trillion after Friday’s rally as FIIs net invested a provisional ₹14,064.05 crore—the eighth highest in a single day since FIIs began investing in Indian markets. Of this, ₹7,000-8,000 crore was on account of investment by global passive funds, and the rest because of active buying.

The FTSE All-World Index, like the MSCI, is used by global investors to decide on allocating funds to developed and emerging market stocks. The index undergoes changes twice a year, in March and September. This time around, brokerage Nuvama estimated ICICI Bank Ltd to have attracted $200 million (about ₹1,670 crore) and Kotak Mahindra Bank Ltd, $87 million ( ₹726 crore).

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The highest single-day purchase by FIIs so far was ₹17,122.71 crore on 6 May 2020.

Domestic institutional investors, on the other hand, net sold shares worth ₹4427.08 crore on Friday.

The Nifty 50 surged to a fresh high of 25,849.25 points on Friday, before ending 1.48% higher from Thursday’s close at 25,790.95. The 30-stock Sensex zoomed to a record 84,694.46 before closing higher 1.63% at 84,544.31 points.

The rupee gained 11 paise to close at 83.57 to the dollar, while spot overseas gold hit a record $2,609 an ounce in anticipation that a weaker dollar will boost demand for the yellow metal by holders of other currencies.

India’s stock market had hit an all-time high on Thursday morning, hours after the US Federal Reserve delivered a 50 basis point interest rate cut.

Where the smart money goes

The financial services, automobile and auto components, oil and gas, fast-moving consumer goods, and telecom sectors led the gains on Friday.

ICICI Bank Ltd, HDFC Bank Ltd, Mahindra and Mahindra Ltd, Larsen & Toubro Ltd, Bharti Airtel Ltd, and Reliance Industries Ltd contributed to 67% of Nifty’s 375.15 point rise on Friday. That’s a reflection of smart money—from wealthy individuals and family offices—flowing into large banks after having booked profits on defence and railway stocks the past few months.

For instance, while ICICI Bank roared to a fresh 52-week high of ₹1,362.35 per share on Friday, the state-run Indian Railway Catering and Tourism Corporation (IRCTC), which is a part of the Nifty Next 50 index, closed at ₹894.25 per share, 21.5% lower than the stock’s record high of ₹1,138.9 on 23 May.

A fall of 20% from a record high technically implies a bear market for a share.

Similarly, defence stock Mishra Dhatu Nigam Ltd, which gained 3.15% to close at ₹395 per share on Friday, traded 28% below its 52-week high of ₹547.50 per share that it had reached in February.

“Smart money seems to be moving into large caps in anticipation of increased foreign inflows into these stocks, which underscores their outperformance to small and mids post the Fed rate cut,” said Nilesh Shah, managing director, Kotak Mahindra AMC.

Shah said domestic institutional money could also favour some large capitalisation stocks that are more reasonably valued than midcap and smallcap stocks whose values have ballooned over the past two years.

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While the Nifty trades at a price-to-earnings multiple of 24.86 times to its five-year average of 24.73 times, the Nifty Midcap 150 trades at a P/E multiple of 46.6 times to its five-year average of 35.97 times.

“Large private banks, FMCG, and pharma appear to be safe refuges, given the steep valuations in many pockets of the market,” said R. Venkataraman, chairman, IIFL Securities Ltd.

Retail investors should not get carried away by euphoria post the Fed rate cut, he added.

Put or call?

The derivatives market also reflects the bullish sentiment, with the Nifty futures contract expiring on 26 September seeing its open interest rising a provisional 11.45% as its price rose 1.18%. An increase in open interest coupled with a price rise implies a long build-up.

Nifty active monthly options saw their total put-call ratio rise to 1.48, which signals that traders have sold 148 puts for every 100 calls sold in the belief that the market won’t fall.

Futures contracts and options derive their value from cash shares and spot indices like the Nifty. Calls are purchased on expectations of a rally, and puts on expectations of a pullback or correction. 

More calls are sold when traders expect stock markets to fall, and more puts are sold when they expect the markets to rise, so they can pocket the premium paid by buyers.

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