Foreign Institutional Investors (FIIs) have infused approximately ₹46,000 crore into Indian equities in the last 19 sessions, signaling a strong return of overseas investment. This influx, which began around April 15, has seen FIIs becoming net buyers, reversing a trend of outflows that had persisted for several months. However, a key question looms: will a detente in US-China trade relations potentially reverse this flow, diverting foreign funds away from the Indian stock market?
Several factors have contributed to the recent surge in FII inflows. Easing geopolitical tensions, particularly the ceasefire between India and Pakistan, have played a significant role. Furthermore, positive global trade developments, including a potential easing of trade tensions between the US and China, have boosted investor confidence. Domestically, a sharp dip in India's April CPI inflation to 3.16% has created room for potential rate cuts by the Monetary Policy Committee (MPC), further incentivizing investment.
The US-China trade scenario introduces a layer of complexity. Concerns are emerging that a trade truce between the two economic giants could diminish India's relative attractiveness as an investment destination. Some analysts suggest that reduced fears of a global trade war might tempt FIIs to return to a "newly seductive China". CLSA analysts have cautioned that a US-China deal could specifically reduce India's appeal, potentially triggering a reshuffling of capital.
However, this perspective is not universally shared. Dr. Vikas Gupta, CEO of OmniScience Capital, argues that Chinese markets haven't offered long-term returns to investors, citing issues with corporate value creation. He points to China's economic challenges, including a high debt-to-GDP ratio, a shrinking working-age population, and weak bank balance sheets, as factors that could continue to deter long-term FII allocations, even if trade tensions ease.
Echoing this sentiment, Vivek Rajaraman, Head of Domestic Investment Advisory at Waterfield Advisors, acknowledges the increased appeal of China due to its economic recovery and advancements in AI. However, he also emphasizes that India's structural growth story remains intact. He notes that many Indian firms operate in sectors insulated from China trade dynamics, such as pharmaceuticals and IT.
The impact of a US-China trade deal on India's manufacturing sector is another crucial consideration. While the trade deal might allow China to regain cost competitiveness in sectors like electronics and textiles, Dr. Gupta views this as a controlled decoupling rather than a complete reversal, suggesting that the "China+1" strategy will continue. This implies that while some shifts in manufacturing may occur, India can still maintain its competitiveness by reworking its production, supply chain, and logistics costs.
Ultimately, the sustainability of FII inflows into the Indian stock market hinges on a combination of factors. While a US-China trade agreement could present a challenge, India's strong domestic demand, improving corporate earnings, and strategic advantages in specific sectors could continue to attract foreign investment. The focus for investors should remain on quality stocks with strong fundamentals, rather than chasing short-term momentum.
