Foreign Investors Return to Indian Stock Market: A Sustainable Trend?
After months of significant selling, foreign portfolio investors (FPIs) have made a notable comeback in the Indian equity market. In early February, these overseas buyers purchased over ₹8,100 crore worth of Indian shares, marking a positive shift following a period of heavy liquidation that saw them offload more than ₹62,000 crore in stocks over the previous three months. This renewed activity signals a potential turning point, but questions remain about whether this trend will endure.
Drivers of the Inflow: Trade Deal Optimism
The recent purchases align with a wave of economic optimism, largely fueled by progress on an India-US trade deal. As negotiations advance, foreign investors appear more confident in India's economic prospects, leading to increased capital inflows. This development has helped lift a cloud of gloom that had settled over the market, previously exacerbated by foreign exits that contributed to a sliding rupee and reduced appeal of Indian assets.
However, experts caution that a durable reversal in this dynamic requires more than just trade deal hopes. For sustained growth, India needs a robust surge in foreign direct investments (FDI) alongside portfolio flows. New Delhi's commitment to expanding imports from the US may be strategically linked to expectations of booming capital inflows overall, which could help balance an enlarged current account deficit.
Key Factors for Long-Term Sustainability
The trajectory of equity prices will ultimately depend on corporate earnings performance. Investors are watching closely to see if earnings take a sharper incline than recent records suggest. Several factors must work in tandem to boost stock indices meaningfully:
- Corporate Earnings Growth: A sustained uptick in profitability is crucial for attracting and retaining foreign capital.
- Foreign Direct Investment: Increased FDI would provide more stable, long-term support to the economy and markets.
- Economic Policies: Continued government initiatives and trade agreements must foster a favorable investment climate.
For now, market participants find relief that stock prices aren't solely reliant on household investments flowing into mutual funds. The return of foreign buyers adds a valuable layer of support, but the market's future strength hinges on a confluence of positive developments across earnings, investments, and policy frameworks.
