FII flows in first half the highest ever

Riding on strong domestic growth, foreign capital flows into India hit an all-time high in the first half of this year despite global uncertainty eroding foreign institutional investors’ (FIIs) appetite for global equities.

At the end of June, flows into the country stood at Rs 31,478.38 crore —- the highest ever in the first six months of the calendar year. The previous peak was in the first half of 2009, at Rs 24,541.30 crore and Rs 24,278.33 crore in 1H2007.

Experts believe India’s improving domestic macro situation and unique domestic consumption model continue to attract the foreign investors even as other global economies struggle with various problems.

Abhay Laijawala and Abhishek Saraf, analysts with Deutsche Bank, said India’s share of regional foreign institutional investor flows (Asia, except China) in 2010 to date has ratcheted up sharply to 48%.    

“This underscores our belief that India’s domestic driven economic model and its strong country fundamentals, including a GDP growth trajectory of 8-9% will act as a strong attraction for foreign inflows,” they wrote in their strategy update report dated July 2.

Inflows into India as a percentage of regional Asia (ex China) flows were at 29% in 2009, 30% in 2004 and 33% in 2005.

The return on equity is relatively higher for Indian companies, which suggests that although there may be a shrinkage in the premium currently being enjoyed by the markets, there won’t be a collapse,” said the head of research of a foreign brokerage, not willing to be named.

Indian markets have in fact outperformed major global markets during this year.

The Nifty has gained 1.69% this calendar (till date) as compared to negative returns elsewhere. Shanghai (down 26.48%), Hang Seng (down 8.18%), Dow Jones (down 7.11%), FTSE (down 8.68%) and CAC (down 12.59%) have all been underperformers.

The recent institutional investors’ survey (with 107 participants) carried out by Morgan Stanley also highlights investor’s bullishness on India.

“About two-thirds of the surveyed investors expect India to continue to outperform emerging markets in 2010 and about half of them are overweight India in their portfolios. Though investors are convinced that global markets will be the biggest driver of equity returns in India, Oddly enough, India appears to be a bit less affected by global developments than what we would have argued a few months ago” Riddham Desai, Sheela Rathi, Utkarsh Khandelwal and Amruta Pabalkar of Morgan Stanley wrote in their India strategy report on July 5.

Though institutional investors see India positively, they are not expecting extraordinary returns this year.

Foreign investors are looking at the markets positively despite the fact that India is relatively expensive compared with other markets, said Vikas Khemani, co-head of institutional equities at Edelweiss Capital.

“The markets appear to be fairly valued at present and we may see time correction. They are likely to remain range ound over the next quarter with 5000-5500 range for Nifty.” said Khemani.