Record FPI flows into India in 2020-21 are a vote of confidence for Modi’s handling of economy

Enthused by the sweeping reforms initiated by Indian government since May last year and flush with liquidity from stimulus packages announced by the US and the EU, foreign investors are betting in billions on India’s future growth prospects.

Foreign portfolio investors (FPIs) poured more than $37 billion into the Indian stock markets in 2020-21. This is the highest investment ever by FPIs (earlier called foreign institutional investors or FIIs).

At a time when the country is just coming out of a technical recession brought about by the Covid-induced lockdown and just turning the corner, this is a huge vote of confidence by some of the world’s most hardnosed investors in the Narendra Modi government's management of the economy and the Covid-19 pandemic.

Western central banks turn on money tap

The flow of funds was helped by central banks in the developed countries pumping in trillions of dollars to try and revive their coronavirus-hit economies, creating a gush of liquidity, part of which is flowing into emerging markets. India, as one of the brightest stars on this firmament, is the recipient of a large share of this huge investment surge.

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“When you compare 2020 to 2021, the numbers will look very very good. That will give a lot of optimism to the markets. Now the hope is that the central banks will continue to feed liquidity into the markets and I believe they will. The US Fed has already signalled that they will do that and I believe we are going to have a good market this year,” said emerging markets guru and chief of Mobius Capital Partners, Mark Mobius in an interview to ET, India’s leading financial daily.

Biden clears $1.9-trillion stimulus package

In the US, Joe Biden signed a $1.9-trillion stimulus package into law soon after taking over as President. Similarly, the European Union has also announced a more than $900-billion revival package.

This is creating excess liquidity in the global economic system. So, fund managers, looking for profitable investment avenues, are pouring at least a portion of this massive pie into emerging markets.

In fact, of the flows in fiscal 2020-21, as much as 40 per cent or $15 billion flowed into the Indian stock markets in the last two months of 2020 alone. And in March, the flows were about $3 billion.

Indian stock at record highs

FPI inflows have pushed the country’s benchmark stock indices into record territory. After crashing 40 per cent from its then all-time high level of 41,994.26 on January 14, 2020 to a low of 25,981.24 on March 23, the 30 share S&P BSE Sensex has almost doubled to 49,509.15 on March 31, 2021. It touched an all-time high of 50,181 on January 21, 2021.

FPIs pouring in money is just one side of the story. They are obviously betting on the Indian growth story, which received a renewed push when the Modi government launched a series of sweeping reforms in its quest to shore up India’s GDP growth rate and position the country as the world’s next manufacturing hub.

Sweeping reforms attracting FPIs

Since May last year, when Finance Minister Nirmala Sitharaman held a series of five press conferences to announce a stimulus-cum-reforms package, the government has unveiled a slew of sweeping changes in the way business is done in India.

It has enacted new labour and farm laws to free up these segments of the economy from the rigidities that shackled them in the past; it has announced that the government will get out of all but a handful of strategic sectors and retain control over a maximum of four companies in such industries.

The government has also opened up space and atomic energy to the private sector; it has allowed commercial mining of coal and also eased rules in the mining sector to allow for private and foreign participation; it has allowed 74 per cent FDI in the defence sector; and it has announced a very progressive production-linked incentive (PLI) scheme to attract multinationals to set up factories in India.

All of these moves will be positive for foreign investment flows, employment generation, demand creation, consumption and GDP growth and are giving foreign investors confidence about the prospects of the Indian economy.

Investors are betting on the future

“The kind of profit growth that India Inc. reported in the September quarter and the December quarter was incredible. This is the widest range we have seen in trailing PE and forward PE – in terms of trailing PE, the market is value between 40 and 50 times; in terms of forward PE, it is valued at between 20 and 30 times. So, markets today are supported by liquidity, sentiments and corporate earnings. The economy may have contracted in the past, but the market is looking at the future,” Nilesh Shah, MD & CEO of Kotak Mutual Fund, told India Global Business last month.

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“Markets are going up because they are anticipating the future. Interest rates are going to play a very important role. Markets anticipate normalcy will come much faster. We had a big fall in 2018 January. Before the start of the bull market, markets shake you out. Corporate India is highly cleansed unlike 2008 and leverage levels are low. We are in the midst of the birth of what is going to be a good bull market,” billionaire stock investor Rakesh Jhunjhunwala, who is often called “India’s Warren Buffet”, told ET Now, a leading financial news channel in India, a few months ago.

As long as that projection continues to hold true and so long as the money tap remains open in the West, the FPIs will continue to invest in Indian equities.