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The Indian equity market witnessed a significant influx of foreign investment in September, with Foreign Portfolio Investors (FPIs) injecting close to Rs 33,700 crore into domestic equities. This surge in investment, attributed to the US Federal Reserve's interest rate cut and the resilience of the Indian market, marked the second highest monthly inflow in 2023, trailing only March's Rs 35,100 crore investment.
The aggressive buying by FPIs was primarily triggered by the US Federal Reserve's 50 basis points rate cut on September 18, which is seen as a significant shift in monetary policy. This move, signaling the beginning of a rate cutting cycle, has pushed bond yields in the US down and encouraged FPIs to invest in emerging markets, including India. With the Fed rate projected to decline steadily to 3.4% by the end of 2025, the attractive investment landscape in India is further solidified.
Beyond the rate cut, several other factors have contributed to the FPIs' bullish stance on India. The weakening US dollar and the dovish stance adopted by the Fed have made Indian equities more appealing. The rupee's strengthening reflects confidence in India's economic stability, further attracting foreign investment. Additionally, balanced fiscal deficits, the impact of rate cuts on the Indian currency, strong valuations, and the Reserve Bank of India's (RBI) commitment to controlling inflation without resorting to rate cuts make India a desirable destination for FPIs.
The recent wave of IPOs announced this year has also played a role in attracting foreign funds, further buoying the Indian capital market. The influx of FPI money has led to a 0.4% appreciation in the Indian Rupee (INR) for the week ending September 20. This strengthens the positive sentiment and could fuel further buying by FPIs.
However, the substantial inflow of funds also raises concerns about the market potentially overheating and valuations becoming stretched. The delicate balance between positive market momentum and potential overvaluation requires close monitoring. The RBI's actions will be crucial in navigating this evolving landscape, with market experts closely watching to see whether the RBI will align with the US Fed by cutting the repo rate in October or delay the decision until December.
The massive FPI investment in both equities and debt highlights the potential for renewed engagement from foreign investors. However, ongoing global volatility and concerns about recession pose a significant challenge. The success of attracting and retaining FPI investment depends heavily on the RBI's ability to maintain a stable and predictable economic environment.
Source: FPIs pump Rs 33,700 crore in equities in September amid US rate cut, domestic market resilience