Sustained corporate earnings, rupee stability, and favourable global trends could bring FPIs back to Indian equities, says Nirav Karkera of Groww. FPIs are closely watching Q2 results after a strong previous quarter and currency depreciation.
Factors Driving FPI Return
A sustained improvement in corporate earnings, stability in the rupee and favourable global developments could encourage foreign portfolio investors (FPIs) to return to Indian equities, said Nirav Karkera, Head of Research and Fund Manager, Wealth by Groww. “A couple of these external trigger events coinciding with sustained improvement in earnings domestically and some sort of stabilization in the INR could cumulatively build a stronger case for FPI’s returning,” Karkera said.
Karkera said foreign investors assess their returns in US dollar terms, making the rupee’s 6-7 per cent depreciation this year a concern. He said the combination of weaker performance of Indian equities and currency depreciation had reduced the attractiveness of the domestic market for overseas investors.
Karkera said September-quarter earnings would be closely watched by FPIs after a strong performance in the previous quarter. “FPIs are expected to return when Indian earnings start getting upgraded again,” he said, adding that much would depend on how the September-quarter results turn out and whether the earlier earnings growth can be sustained.
He also pointed to a possible reversal in US bond yields and a correction in overseas AI-related stocks as potential triggers for renewed interest in Indian markets. “Another external trigger could be a correction in AI trades and AI stocks overseas that could trigger some profit booking and open up the possibility of exploring Indian markets,” Karkera said.
Valuations and Rupee Outlook
On valuations, Karkera said they were not a major concern at present. He noted that large-cap stocks were trading at a discount to their long-term averages.
Key Factors Influencing the Rupee
On the rupee, Karkera said the recent FCNR inflows should not be viewed as a sustainable source of support for the currency. He said the dollars raised through the RBI’s swap window had provided a one-time boost to reserves and would eventually have to be returned when the swaps mature.
He identified crude oil prices and portfolio flows as the two key factors influencing the rupee’s movement. Karkera said crude oil prices staying above USD 100 per barrel could put further pressure on the rupee by widening the trade deficit.
Higher US yields and narrowing spreads between Indian government securities and US Treasuries could also weigh on the currency. Despite these concerns, he expects the Reserve Bank of India (RBI) to prevent a sharp fall in the rupee. “The rupee we expected to continue to have a depreciating bias in the near to medium term,” he said, adding that the central bank would not allow a steep decline and would allow the currency to find its natural level in a calibrated manner.
Strong IPO Activity Amid Weak Secondary Markets
Karkera also highlighted the contrast between weak secondary markets and strong initial public offering (IPO) activity. Mainboard IPOs raised around Rs 94,000 crore between April and September, while average listing gains increased to around 19-20 per cent from 7-8 per cent during the same period last year.
“The optimism is not really just domestic, it is also global about the businesses that are listing on the main boards,” he said, pointing to healthy FPI participation in IPO anchor books.
Market Outlook and Retail Investor Sentiment
Looking ahead, Karkera said resilient macroeconomic conditions, improving earnings and strong domestic flows continued to support the positive outlook for Indian equities. However, he cautioned that nearly eight quarters of limited market gains could eventually test retail investor patience.
“Most fatigue and disappointment seeps in more through the passage of time and not as much through intermittent declines,” he said, adding that a rise in SIP stoppages could weaken an important source of market support if FPIs take longer to return. (ANI)
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