Indian equity markets have seen a positive net inflow from foreign investors for the second consecutive month so far. In the month of October, the market saw a net inflow of $508million while in the month of November so far the inflows have been $292 million. With the interest rate cycle in India expected to peak out in the near-term , this trend of positive inflows coupled with market?s resilience around the 17,000-level could be promising for equity investors, says market participants. A look at the historic trend of monthly foreign institutional flows indicates that it requires at least three months of positive fund flows to expect a turnaround in the market sentiment during a bearing phase.
The equity market in India has seen FII flows since October with recovery in the equity markets across the world. According to the CIO of a fund house, the month of October saw a worldwide ?risk-on? trade resulting in rise of equity markets. ?The FII flows were a result of a nominal rise in risk appetite as traders discounted the possibility of a solution on the European debt problems. As the markets in the US and Europe rallied about 15 to 20% , Indian markets saw a gain of 8%,? he added.
The historic trend of the monthly FII inflows showed that during a secular market phase, the flows always mirrored the underlying market sentiment and their deviation in the opposite direction could not last for more than two months. In other words, in a bullish market phase, net inflows did not turn negative for more than two months historically speaking. In a bearish market phase, the net positive flows sustained only for about two months.
For example, in the latest bear phase since November 2010, there has been two instances when the monthly inflow turned positive for two consecutive months during market retracements. However, this swing failed to be a turn-around phase for the market as both the retracements did not materialise into a change in market trend.
In both March and April 2011, the average FII flow into the equity market stood at about R150 crore as the market retraced about 8% from its February close. In a similar way, the net FII flow turned positive during June-July 2011 as the market showed a sharp recovery from the intra-month low of June.
According to market experts, the decline in the interest rates expected over the next three to six months could result in a better macro environment, over the near-term. However, they expect the events in the Euro zone to determine the overall risk appetite of global investors which in turn could determine the inflows into Indian equities.
Piyush Garg, CIO of ICICI Securities says, ?The FII outflow at the start of the year was due to weakening domestic macro environment. Even as the market has discounted these headwinds and going ahead things could look better on this front, the current subdued interest for the Indian equities amongst global investors is a result of the ongoing European debt crisis which has kept the risk-on trade under a tab.?