Foreign flows may dictate market momentum again

Inflows slowing for MFs, insurance firms

The market may face rough weather again, much like in March this year, and move in the direction of foreign flows, as inflows from domestic institutions have started slowing down, especially from mutual funds and insurance companies, as indicated by June and July monthly data.

In August too domestic institutions have been booking profit and brisk inflows from the foreign portfolio investors are keeping the market momentum intact.

In August so far FPIs have invested Rs 10,420 crore, surpassing the July month investment of Rs 7,563 crore.

On Tuesday domestic institutions were net sellers by Rs 1,415.54 crore while the foreign portfolio investors were net buyers by Rs 1,013.66 crore.

Whether these are sticky investments from the long only funds or short-term investments by fly by night operators, only time will tell.

India witnessed foreign portfolio investment outflow of $16.05 billion in March 2020 and $1.97 billion during April-May 2020, triggered by the Covid-19 fallout on domestic and global economy.

Upcoming US presidential election and continuing threat of Covid-19 are likely to drive investors away from risky asset classes.

Mutual fund flows have fallen sharply in June and July to Rs 240.55 crore and an outflow of Rs 2,480 crore respectively compared to inflows of Rs 6,212.96 in April and Rs 5,256.52 crore in May 2020.

"Net flows in the open ended equity fund category have been on a downward spiral since April and barely positive at Rs 240 crore in June. In July, the trend continued, leading to net outflows of Rs 2,480 crore. On the positive side, flows through systematic investments plans (SIPs) have sustained around the Rs 8,000-crore mark till June (numbers for July are yet to be released), said a report by rating agency Crisil..

Private life insurance players' premium declined 7.1 per cent in July 2020, similar to the decline in June 2020 while the life insurance industry as a whole posted a decline of 0.3 per cent. The overall decline has moderated considerably from the levels seen over March-May 2020. For FY21 year to date, private players’ individual premium received declined 18.1 per cent yearon-year while for the industry, it dropped 12.6 per cent YoY, said a report by Motilal Oswal.

So far this year, the impact of foreign investors pulling their money out of India did not lead to any macroeconomic instability. Rather, foreign exchange reserves increased to $517.64 billion (foreign currency assets: $477.81 billion) on 17 July 2020 from $476.88 billion ($442.21 billion) at endMarch 2020.

The rupee's strength against foreign currencies remains the key to foreign portfolio investors staying invested in India, said analysts.

“Swelling of foreign exchange reserves in combination with benign oil prices and tepid imports, leading to a current account surplus, has helped the rupee to remain broadly stable since mid-March 2020, despite deterioration in some of the other macro parameters such as retail inflation, fiscal deficits and negative GDP growth,” said India Ratings & Research.