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Foreign investors are returning to Indian equity markets as global funds shift away from the artificial intelligence infrastructure trade in markets such as the US, Japan, South Korea and Taiwan, while India's relatively attractive valuations and falling crude oil prices are improving its investment appeal, banking and market expert Ajay Bagga said.
According to NSDL data, foreign investors have pumped over Rs 53,000 crore into Indian equities in November so far, following two consecutive months of selling. In an interview with ANI on Wednesday, Bagga said it was too early to conclude whether the recent buying would turn into a sustained trend, but identified the reversal in the global AI trade as one of the major reasons behind the return of foreign money to India. "Money from that is flowing out, be it from Korea, be it from Japan, be it from Taiwan or even from the US hyperscalers. Some of those funds are coming back into India," Bagga told ANI. He said India had underperformed global markets over the last two years, making its valuations relatively more attractive for foreign investors. Bagga said India had also become an under-invested and underweight market for several global institutional investors after witnessing foreign outflows of more than USD 70 billion over the last two years. The recent buying, he said, partly reflects a normalisation of foreign investment positions. Another important factor supporting the return of foreign investors is the decline in crude oil prices following a partial resolution of the Iran conflict. Bagga said the fragile peace had reduced crude prices, providing relief to India's inflation outlook, current account deficit and currency. He added that the rupee had appreciated against the US dollar and Indian bond yields had declined as expectations of inflation eased. On sectors attracting foreign investment, Bagga said "Everything to do with financials, capital goods because the government capex has stayed strong through thick and thin over the last 6 years,". However, Bagga cautioned that rising inflation in the US could create challenges for the continuation of foreign investment flows into emerging markets, including India. He said the latest US Consumer Price Index (CPI) data showed headline inflation rising 0.4 per cent month-on-month, while core inflation increased 0.3 per cent. Bagga said that the recent inflation readings indicated a broader rise in price pressures in the US. He said the stronger US labour market and rising inflation could give the Federal Reserve room to increase interest rates. "It's become more or less a certainty that on 9th December the Fed will hike rates," Bagga said. He added that higher US bond yields and a stronger dollar could make investments in emerging markets less attractive. Bagga said he was currently forecasting three US rate hikes, including one in December and two more by June next year, after which he expects the rate increases to stop. He outlined that the possibility of higher US interest rates becomes negative for continued foreign inflows into India. (ANI)
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