Nine-month high FPI inflows lift India’s global weight on MSCI EM index

Domestic equities received an added boost from foreign portfolio investor (FPI) inflows, which rose to the highest level in nine months, pushing India’s weight on the Morgan Stanley Capital International Emerging Markets (MSCI EM) Index above 20% in September. Foreign sentiment is expected to stay bullish based on the derivatives rollover data, said analysts.

FPIs net invested ₹57,359 crore in September, the most since ₹66,135 crore in December last year, shows National Securities Depository Ltd (NSDL) data. September has recorded the fourth-largest FPI net inflows to date, aided partly by global index provider FTSE’s semi-annual rebalancing, which resulted in around ₹7,000-10,000 crore inflows this month, thanks to passive buying by global funds and exchange-traded funds.

“The overall jump in FPI buying has driven India’s weight on MSCI EM to 20.7% as of now,” said Abhilash Pagaria , head, Nuvama Alternative & Quantitative Research, citing MSCI data. India’s weight was 19.9% last month, second only China’s 24.42% among the EM pack.

MSCI, like FTSE, is a global index provider whose indices are used by global money managers to allocate funds across asset classes.

Also read | India surpasses China as the largest MSCI Emerging Market amid stock market rally

Market veteran A. Balasubramanian, chief executive of Aditya Birla Sun Life AMC, expects the FPI buying to continue apace, with a caveat that one shouldn't lose sight of China.

“Two factors will continue to fuel FPI inflows, one being India’s weight increase on the MSCI indices, which bolsters passive flows into stocks, and lower crude prices, which benefits both India and China,” he said. “In respect of FPI flows, one should keep China in sight, especially if it gets its act together in preventing a slowdown, as seen in the past few weeks.”

Post the US interest rate cut on 18 September, China’s central bank cut a key short-term rate at which it borrows from banks by 20 basis points and on existing mortgages by half a percentage point. (A basis point is one-hundredth of a percentage point).

“India, the fastest growing G-20 economy, is on autopilot mode while China is a hope trade for FPIs,” Balasubramanian said. “It could therefore attract relatively higher FPI inflows than India if it puts in place more measures to address the economic slowdown.”

In the short term though, FPI flows are expected to support bull market sentiment despite rising valuation concerns.

“This series, for the first time in a long while, was all about the heavyweights and the resurging private banks,” said Nuvama’s Pagaria, referring to the recent expiry of the September series of derivatives and rollover of positions to the October series.

“Their jaw-dropping performance outshined even the Smid (small- and mid-cap) indices. The catalyst? The return of FII (foreign institutional investor) flows into Indian markets and alongside non-stop DII (domestic institutional investors) participation. With FIIs channelling significant chunks into heavyweights like HDFC Bank, ICICI Bank and Axis Bank, the rally had the perfect fuel to keep going as Nifty 50 Index settled at an all-time high till date at 26,216. We remain structurally bullish India,” he added.

Also read | India to get higher FII flows after US rate cut

Derivatives contracts normally expire on the last Thursday each month. If the outstanding market positions, referred to as open interest, remain elevated at the start of a new series alongside higher stock and index values, the sentiment is expected to be bullish.

Nuvama’s analysis of rollovers to October shows market-wide futures open interest (index and stocks) at the start of October series at a historic high of ₹4.8 trillion compared with around ₹4.7 trillion at the start of September series.

Analysts expect fund flows to trump valuation concerns. While FIIs have net invested ₹1 trillion so far this calendar year—with almost three-fifths of that coming in September—DIIs have pumped in ₹3.34 trillion this calendar year.

This has led to the Nifty trading at a price to earnings multiple of 25.6 times against the five-year average of 24.75x, while Nifty Midcap 150 and Nifty Smallcap 250 trade at PEs of 47.4x (against the five-year average of 36.1x) and 35.67x (28.75x).

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Leading momentum indicator Relative Strength Index (RSI) of Nifty is at 83.92 on monthly basis, a 17-year high. A level above 70 indicates overbought markets and below 30 indicates oversold.

Andrew Holland, chief executive officer, Avendus Capital Public Markets Alternate Strategies, expects FPI flows to continue “apace” thanks to the US Federal Reserve’s reversing rate cycle, which will goad the Reserve Bank of India (RBI) to cut rates in December. He added that foreign fund flows in September had also been via the primary market route, citing the ₹6,560 crore Bajaj Housing Finance issue which garnered interest from the likes of Morgan Stanley, Nomura and HSBC.