FIIs keep faith in India story despite macroeconomic concerns

The Indian economy may be slowing but foreign institutional investors (FIIs) have kept the faith. There has been a surge in FII inflows into India in 2013. In the first four months of the year, FIIs have deployed $11.3 billion in Indian equities, up 31 per cent from the year-ago period which saw inflows of $8.6 billion. And analysts expect the interest in India to sustain for much of 2013. The Indian stock market is driven by FIIs - in 2012 the Sensex gained 26 per cent per cent on FII inflows of $24 billion.   
 
"Yes, I see the tempo sustaining," says Rajesh Cheruvu, CIO India at RBS Private Banking, which manages the portfolio of high networth individuals abroad. Indeed, Cheruvu expects FII flows to scale new highs this year, surpassing the record $29 billion in 2010. A short-term trigger for FII inflows could be a possible rating upgrade for India, given the fall in commodity prices will help in lowering the country's current account deficit, he says. Global credit rating agency Standard & Poor's (S&P) currently rates India as BBB-, which is the lowest in the investment grade, with the outlook being downgraded from stable to negative in 2012. S&P has expressed concern over India's high fiscal and current account deficit.
 
"India is benefiting from the reallocation of global flows," says Saurabh Mukherjea, Head of Equities at Ambit Institutional Equities. His optimism is based on a couple of developments - weakness in Japanese yen, likely to lead to a surge in capital inflows into the emerging markets, and lower inflation in India which will lead to lower interest rates. The India market is also reasonably valued, he adds. Currently, the Sensex is trading at a forward price earnings multiple of 12.    

While FII inflows into Indian stocks slowed from an average of $140-150 million a day in March to $40-50 million in April, analysts see it as a temporary blip. "Going ahead, a good monsoon will boost FII sentiment," says G. Chokkalingam, Executive Director & Chief Investment Officer at Centrum, a Mumbai-based financial services firm, which manages an equity portfolio of Rs 350 crore. Indeed, India is still getting greater inflows than other Asian markets. "Barring China other markets in the region are still smaller and FIIs scout for bigger markets. India will have a sizeable share in the pie," says Cheruvu, who expects at least $500 billion capital shifting from assets like gold and debt into equities globally.
 
Chokkalingam expects a slowdown in FII flows ahead of the general election in early 2014 as global investors hate political uncertainty. "Majority of the FIIs are likely to book partial profits towards the fag end of 2013," he says.