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Strong macros, falling crude attract FPIs to equities

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By Ashley Coutinho

Foreign portfolio investors (FPIs) have shopped for equities worth $8 billion since July, aided by a correction in commodity prices and India’s relatively strong macro fundamentals. This is after yanking out $33.5 billion between October and June.

India’s relative outperformance vis-à-vis other emerging markets has gained traction in recent weeks and the outperformance is now highest since 1999-2000 period, said the brokerage. The 50-share Nifty is trading at a valuation of 19x its 12-month forward P/E as on September 7.

“India’s sustained growth momentum and the relatively benign inflation in the context of continued global disarray on account of tensions in Ukraine and the Taiwan straits, have attracted FPIs back to Indian equities,” said UR Bhat, director at Alphaniti Fintech.

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India is seen as the favourite among emerging markets because of the relative resilience of the rupee and forex reserves, as also relatively low levels of external debt, current account and fiscal deficits.

“On a growth adjusted basis, Indian equities are better placed vis-à-vis competing emerging markets while offering much better sector diversity and a huge domestic market for goods and services,” said Bhat.

India’s weightage in the MSCI EM index has shot up to about 14.49% now from 8.1% at the end of October 2020. The number of constituents in the MSCI EM Standard Index is now at 108 stocks, compared with 87 as of October 2020.

“The two factors that have driven fresh inclusions and an uptick in the weightings of existing Indian constituents are the new regime on foreign ownership limit taking effect in the November 2020 review and domestic stocks’ strong outperformance to other EM counterparts,” said Abhilash Pagaria, head of Edelweiss Alternative and Quantitative Research.

FPIs have now turned their attention to domestic-facing sectors such as banks and consumption stocks which are immune to global shocks, according to Hitesh Jain, lead analyst – institutional equities at YES Securities. India’s thrust on manufacturing and a rebound in industrial output are also drawing investments in capital goods.

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The Nifty Bank and Nifty Consumption indices have risen 17.6% and 20%, respectively, in the last three months.

“FPIs’ under-ownership of Indian equities compared to historical levels, exodus of investments from Russia finding an alternative in India and funds looking at diversifying investments away from China are some of the factors prompting resumption of FPI inflows in Indian equities,” he said.

An increase in global crude oil prices, aggressive tightening by the US Federal Reserve and an upmove in the dollar index, however, could play spoilsport and impact FPI flows, said experts.

Continuing rural woes: No cogent evidence yet of a rural revival, the problem is more than cyclical

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The latest set of numbers put out by the leading fast moving consumer goods companies doesn’t inspire much confidence about the state of demand in rural India. Nor do many other proxy markers of the rural economy, like farm credit/exports or reservoir water levels, which indicate that the consumption demand in the rural sector hasn’t really recovered from the shock of the second wave of Covid. The rural woes had worsened even before the pandemic—the World Bank estimates that real rural wages in India have stagnated over the last decade. With elevated inflation, real wages in the hinterland are seen to have fallen through FY23 and much, if not all, of H1FY24. This sharply contrasts with the decent 7.5% growth reported for private consumption expenditure in the last fiscal year, and the Reserve Bank of India (RBI) survey that showed a four-year peak in overall consumer confidence in September 2023. Clearly, it is the urban areas that are holding the fort.

Though the crop damage caused by unseasonal (pre-monsoon) showers and uneven distribution of monsoon rainfall may have contributed to the longevity of the rural torpor, it has deeper underlying reasons. There is a shift in terms of trade away from the farmer and the average rural worker/trader, contrary to what policymakers claim. Wages are nearly half of rural household income, and well over a third is realisation from farming. There has been a lack of policy impetus to boost farm- and non-farm wages over several years. At the same time, the income support to farmers in the forms of minimum support prices (MSPs) and direct cash transfers (PM Kisan) have seemingly been offset by high inflation. The rise in farmers’ income has lagged that of other sections of the society, including large companies, and HNIs, undermining the rural purchasing power.

However, since the infirmity of the sector is not seasonal, it is necessary to address the issue with a well-planned policy response. To be sure, the stagnant rural sector reflects a larger structural shift in the economy, the brunt of which is borne by small businesses and (highly leveraged) households. The recent policy steps, like seeking to contain food inflation through easing of imports and curbs on exports, would only aggravate the problem. What’s needed is sustained effort to raise farm productivity and output, and improve price discovery of farm produce.