Why did FIIs Invest Rs.16,300 crore in September?

During the month up to 17-September, the foreign institutional investors (FIIs) infused Rs.16,305 crore into Indian markets. Out of this, the FIIs infused Rs.11,287 crore into equities and Rs.5,018 crore into debt. This is almost equal to the total infusion by the FIIs in the entire month of August. What has driven the surge in FII flows into India? After all, the IPO scene in September is hardly as aggressive as it was in August.

FII inflows into debt were driven by 3 reasons. Firstly, there is the stable to strong rupee, which ensures that returns are protected or enhanced in dollar terms. Secondly, the yield spread between Indian bonds and US bonds widened by more than 480 basis points due to a sharp fall in US bond yields. Thirdly, FIIs are also being attracted to Indian bonds on hopes that they will be included in the JP Morgan Bond Index, encouraging passive flows.

In the last few days, a series of far-reaching reforms pushed up FII appetite for Indian equities. The government announced an aggressive Rs.26,000 crore automobile & drone PLI scheme and set in motion the creation of a bad bank to take over stressed banking assets. In addition, the Telecom Relief Policy was a pleasant surprise while the recent aviation capacity boost also enthused FII investors.

Also Read: Which auto stocks gain from Rs.26,058 crore PLI scheme?

However, flows are not restricted to India alone as most Asian emerging markets saw robust flows in September. For instance, FIIs infused $2.60 billion into Taiwan, $535 million into South Korea and $290 billion into Thailand. Even Indonesia got $162 billion of FII inflows in September. Even as valuation risks are still prominent for EMs, FIIs see these EMs as compelling alpha stories.

There are two events to watch out for. The FOMC meets on 21st and 22nd September and is expected to give a timeline for taper. The likely Evergrande implosion in China is also an event that could have negative implications for Asian EMs, including India. That may set the tone for the coming weeks.