The foreign portfolio investments (FPI) in the equity markets have gathered pace in the last one week. While the first half of the current month saw continuous selling by foreign investors, in the recent past their buying interest has returned. As a result, for the month so far they have garnered equities worth $1.4 billion.
Despite this revival, momentum in foreign purchases in the start of the year was dwarfed by their buying action in a similar period during 2013 and 2012. In the first 18 trading sessions of both these years, FPIs in equity market stood stronger at $3.3 billion and $1.8 billion, respectively. On average, the net FPIs stood at $22 billion in both these years.
With India enjoying a preference amongst emerging markets and its Asian counterparts, it is widely expected to receive its fair share of foreign fund flow. While the US Federal reserve is likely to start raising interest rates sometime this year after concluding its monetary easing programme termed quantitative easing (QE), last week’s announcement by the European Central Bank (ECB) to its own liquidity infusion exercise may also benefit Indian market. Last Thursday, ECB announced the central bank will buy assets between starting March 2015 and September 2016.
In the recent past, BofAML pointed out that the ECB action should support portfolio equity inflows to Indian market, offsetting US Fed tightening to some extent. The foreign broking house pegs FII flow of $25 billion for fiscal 2015-2016 post the ECB measure.
Such healthy expectations notwithstanding, high valuations of Indian equities may play a key role this time around, unlike 2012 -2013 when the Indian market was reasonably valued — trading at one year forward earnings multiple of 12 to 13 times. After sustaining its record spree, the benchmark Sensex currently trades at a forward price to earnings ratio of about 16.4 times, about 10% premium to its average value in the last decade.