FIIs Invest $1 Billion in IT, Divest from Financial Services

Foreign investors acquired over $1 billion in IT stocks in the latter half of July, influenced by robust June quarter earnings that met expectations, fostering optimism about a sector recovery.

In contrast, they divested nearly $1 billion from financial services due to sluggish deposit growth reported by numerous lenders. Recently, the RBI governor voiced concerns over structural shifts in the financial sector, highlighting that faster credit growth compared to deposit growth might lead to structural liquidity issues within the banking system.

Analysts observe that moderated credit demand and challenges in raising deposits have led to investor caution regarding the banking sector. Since Non-Banking Financial Companies (NBFCs) depend on banks for funding, issues in the banking sector are likely to affect them as well.

Foreign Institutional Investors (FIIs) also heavily invested in the metal, auto, healthcare, and telecom sectors, with investments amounting to ₹5341 crore in metal and mining, ₹3155 crore in auto, ₹2676 crore in healthcare, and ₹2204 crore in telecom. Additionally, they invested ₹1787 crore in consumer services and ₹1315 crore in capital goods.

On the flip side, FIIs sold ₹2900 crore in the power sector and ₹2021 crore in the services sector, along with ₹300-800 crore in FMCG, construction, chemicals, and oil & gas.

In July, foreign investors injected ₹32,365 crore into Indian equities, driven by expectations of ongoing policy reforms, sustained economic growth, and a better-than-anticipated earnings season, according to data from depositories. However, they withdrew ₹1,027 crore from equities in the first two trading days of August (August 1-2), the data indicated.

FPI flows have shown a mixed trend following the Budget announcement of an increase in capital gains tax on equity investments.

Looking ahead, developments in the US economy and markets will influence FPI trends in August, according to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. “Weaker-than-expected employment data coupled with a slowing economy makes it likely that the US Fed will cut rates in September. The key question is the extent of the cut, with strong commentary suggesting a possible 50 basis points rate reduction,” said Vaibhav Porwal, Co-founder of Dezerv.

Net inflow from foreign portfolio investors (FPIs) reached ₹32,365 crore in equities in July, following ₹26,565 crore inflow in June driven by political stability and a sharp market rebound.

Prior to this, FPIs withdrew ₹25,586 crore in May due to election-related uncertainties and over ₹8,700 crore in April over concerns regarding changes to India's tax treaty with Mauritius and a consistent rise in US bond yields.

The resurgence in FPI investment is attributed to sustained economic growth, the government’s focus on infrastructure development, and a better-than-expected earnings season that has improved corporate India's balance sheet, according to Himanshu Srivastava, Associate Director - Manager Research at Morningstar Investment Research India.

Additionally, upward revisions of India’s GDP forecast by the IMF and ADB, and a slowdown in China, are also favorable for India, he added. Beyond equities, FPIs invested ₹22,363 crore in the debt market in July, pushing the debt tally to ₹94,628 crore so far this year.