India got overseas flows to the tune of ₹3.33-lakh crore, or $40.4 billion, in equities, debt and hybrid instruments put together this financial year, a record for any year. This is 25 per cent higher than the previous high of ₹2.67-lakh crore garnered in FY21.
Equity flows stood at over $25 billion, more than flows received by all other Asian markets except Japan, which received $59.5 billion. China, on the other hand, saw outflows of over $67 billion in the 12 months to December. Some of the flows could have made their way into India.
According to reports, emerging market investors in the US are increasingly favouring exchange-traded funds that avoid exposure to China. There is a noticeable uptick in interest towards MSCI ex-China ETFs.
India’s market cap is currently the fifth largest globally, but India’s weight in global indices is still low. This should change as market free float rises and some weight anomalies get sorted out, according to Jefferies. India will become a $10 trillion market by 2030 — impossible for large global investors to ignore, the brokerage said in a recent note. The market depth in India has also increased considerably over the last few years, with the number of stocks with a market cap of more than $1 billion nearly doubling to 500.
“The flows have largely been driven by the performance of our economy which has done well despite geopolitical conflicts, Covid, and rate action by the US Fed. Quite a lot of the growth is domestic-led and there is still scope for further improvement given the migration to urban areas,” said UR Bhat, Director of Alphaniti Fintech.
Bhat added that the PLI schemes and the China plus one story had helped the cause of Indian manufacturing. The massive investment in infrastructure modernisation is helping companies in the materials, real estate and construction space. Banks now have cleaner balance sheets with low NPAs which augurs well for the economy as a whole.
Global bond index inclusion
FPIs have invested $14.4 billion in Indian debt, higher than all other years except FY15 and FY18. Investors have taken a shine to government bonds since September last year, anticipating India’s inclusion in global bond indices. Another $1.5 billion of FPI money has flowed into hybrid instruments, data from NSDL showed.
“An interesting feature of the foreign portfolio investment in India this fiscal is the steady growth in debt investment in sharp contrast to the volatile equity investment,” said V K Vijayakumar, Chief Investment Strategist of Geojit Financial Services.
The inclusion of Indian bonds in the JP Morgan EM Bond Fund and Bloomberg Bond Index is expected to bring in around $25 billion, starting June this year.
While inflows will continue, Vijayakumar believes a sharp surge in debt flows is unlikely, given the rise in US bond yields in the past few days. “If the differential between developed market bond yields, particularly US bonds, and Indian bond yields decline, the debt inflows will moderate,” he said.