Indian markets have taken a breather after two days of hectic trade. While the massive 3,000-point rally on Monday followed by profitbooking the next day was exciting, what’s particularly striking is the continuous flow of funds by foreign investors. Despite the ongoing geopolitical tension, foreign institutional investors have continued to be net buyers in May so far. But is that about to change, especially after the progress in the US-China trade talks?
Key market observer and expert Ajay Bagga pointed out the worry at this juncture is “The short position of FPIs in the futures segment is a cause for mild concern.”
Possibility of ‘Sell India, Buy China’ trade gaining momentum?
One of the primary apprehensions amongst market participants is the risk of flows going back to the “Buy China, Sell India” mode. Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments pointed out that the, “The sustained robust FII buying which lifted the largecaps is likely to weaken in the new context of trade deal emerging between US and China. The possibility of a ‘Sell India, Buy China’ tactical FII trade cannot be ruled out now. This will weigh on large caps and strengthen the case for a further rally in mid and smallcaps, despite the valuation concerns.”
According to Ajay Bagga, “US-China trade talks with almost all of the Chinese objectives being met is a signal for the rest of the world to look beyond the Trump and seek more constructive deals. The strengthening of the US dollar as a result of this is negative for EM flows, as funds will seek to invest in a more predictable US market. China is also marked for more investments as a big overhang has been removed from the Chinese markets.”
All eyes on India’s macro fundamentals
So far, the FIIs have net bought equities worth over Rs 50,000 crore since April 15. in fact, last week India recorded an inflow of $326 million, following a strong $724 million the previous week—its highest since July 2024. Notably, $257 million flowed into India-dedicated funds, marking the 4 consecutive week of inflows, all of which remain focused on large-cap segments.
Barring two instances of them selling, they have been net buyers in equities on most days in the last 1 month, given the improving macro fundamentals and increased prospects of RBI rate cut on cooling inflation and the Govt push for consumption.
Bagga explained that the “probability of the 90-day window translating into a semi-permanent trade deal between US and China is very high but that does not undermine India’s chances either. That raises hopes for the rest of the world as well. India should benefit from both a trade deal and enhanced flows into Indian markets on the back of its attractiveness as a growth economy with multiple drivers for corporate earnings recovery.”
Cannot ignore the dollar
Empirical evidence shows that the fund flows to India, other emerging markets and the dollar’s movement has always been inversely proposal. In the last two weeks, India, Taiwan and Brazil received significantly large chunk of the EM flows followed by China and South Korea.
This is also the time when we saw that the dollar has been in doldrums. The Dollar Index has slipped over 8% from the January highs of 110 levels and fallen to lows of 98 in late April, It has since then been hovering around the 100 mark for the past few weeks.
US Fund flows weakening
Meanwhile, an Elara Securities study show that US fund flows are showing signs of weakening for the first time since June, 2022. After significant post-Covid inflows between October, 2020 to May, 2022, the trend reversed post June, 2022, leading to a market correction.
They are now noting that “similar early signs of strain are reappearing, primarily due to softening fund flows—there have been outflows in six of the past seven weeks, marking the longest streak in nearly two years.” According to Elara Securities, “interestingly, foreign investments into the U.S. remain resilient.”