Chart: Will foreign investors continue to be bullish on India?

Until now, foreign investor optimism has been running quite high. It’s a trend that picked up in the December-ended quarter as reflected by the shareholding pattern in the BSE 500 companies, which climbed to 12.2 percent from 11 percent a year ago, according to a report by ICICIDirect.

Given that foreigners have poured more than Rs37,295 crore (almost $ 7.5 billion) in Indian stocks since the start of this year, it’s likely that new data will show that its share has increased over the past few months.

“The optimism displayed by FIIs in the Indian corporate growth story arises from the fact that the Indian economy remained relatively insulated from the global economic meltdown mostly on account of the strong domestic consumption, thrust on infrastructure development and a strong banking system” said ICICIdirect in its report.

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The big question is, will that trend continue given the Congress’ defeat in UP and Punjab elections?

Source :ICICIdirect

From the chart below, it’s clear that the banking sector has been the favourite among sector investments. The banking sector retained its top position for eight of the the nine quarters analysed by the investment research firm. FIIs had an 11 percent exposure to this sector in the December quarter. Power and metal companies also received allocations of 6.6-7.9 percent, although their shares have declined slightly from the September quarter.

[caption id=“attachment_237161” align=“aligncenter” width=“450” caption=“Source :ICICIdirect”]  [/caption]

Mutual Funds were unable to have a significant impact on the markets as they were troubled by liquidity concerns related to limited inflows and redemption pressure, ICICIDirect said. MF holding in BSE 500 has remained in the range of 3.1-3.6 percent for the last nine quarters. For MFs, some sectors like Banks, Oil & Gas, Metals, Power and construction had the highest allocation in their portfolio. Real estate had the lowest allocation at a mere 0.4 percent.

[caption id=“attachment_237173” align=“aligncenter” width=“461” caption=“Source :ICICIdirect”]  [/caption]

A study of retail investor behaviour shows that their investments were also skewed in favour of sectors like banking, metals and construction (they accounted for a combined 25 percent of allocations). Telecom stocks fell out of favour, as investors reduced their exposure to 5.8 percent from 7-8 percent earlier.

At the moment, it’s difficult to tell whether foreigners will continue to invest robustly in India’s capital markets. Some experts believe the results could inhibit the government from taking any bold reform measures and lower the prospects of the economy, which could dampen the appetite of foreign investors. Indeed, the Sensex reported volatility as it closed lower at 17,173 points on Tuesday, 500 points lower from its intra-day high on the elections results, as investors sensed more economic policy-making delays ahead. The rupee also plunged below 50 against the dollar.

So, will foreigners call a halt to their investments in stocks? We’ll probably have to wait until the Union Budget, set to be presented on 16 March, to get a clearer picture.