FPI inflows push MSCI India Premium to near-record high

Analysts expect this premium to test its previous peak, following Tuesday’s surge in the Nifty and Sensex to new highs, driven by provisional foreign portfolio investment (FPI) flows of ₹5,223.51 crore. Nifty reached a fresh high of 20,864.05, and the Sensex hit a new peak at 69,381.31. Also, the Bank Nifty index hit a record 47,230.55, driven by ICICI Bank and the State Bank of India, both gaining over 2% each.

MSCI data for 5 December will be updated on Wednesday, but the rally to record highs in Indian markets may have widened the spread.

“The widening spread indicates outperformance of India to other EMs that make up the MSCI EM index,” said Abhilash Pagaria, head of Nuvama Alternative Research.

“With the continuation of the present leg of the rally, underway since 26 October, it’s likely that we may witness the premium testing its record sooner than later,” said Pagaria.

Pagaria said large-cap banks will be the main beneficiaries of the resumption in FPI flows to India in November-December, after a two-month hiatus.

In India, financials, including banks, constitute 32.5% of the total assets under custody (AUC) held by the FPIs, according to NSDL data of 15 November.

Pagaria said the banks’ share as a percentage of the total FPI assets is now at 32.5%, against 35-37% in favourable years. Resumption of inflows suggests that the AUC of financials would rise, reflecting in the MSCI Index.

The AUC of financials stood at $213 billion against total assets of $655.8 billion (32.5%), in the fortnight to 15 November. It was at 34.85% as of the fortnight ended 31 December, 2020, which saw FPIs pump in the highest ever monthly sum of ₹6,2016 crore.

“Large-cap banks that have been laggards, will be attracting incremental FPI flows,” Sudip Bandyopadhyay, non–executive director, Indiatrade, said. “Our markets are in a goldilocks scenario due to political stability, falling inflation and yields globally. This will attract more FPIs to standout markets like India,” he added.

ICICI, HDFC, Axis Bank and Bajaj Finance are among top 10 on the MSCI India index.

Financials also constitute the largest sectoral weight on MSCI India at 27.11%, followed by IT (13.05%) and consumer discretionary (11.49%).

India’s weight on the MSCI EM index was 15.88% as of October-end, second only to China’s (29.89%). Taiwan, with a weight of 15.07%, enjoyed the third-largest country weighting on the index.

FPIs were net buyers of Indian shares worth ₹20,963 crore in the month through 4 December. This excludes the provisional figure on BSE. So far this fiscal, they have purchased shares worth ₹1.52 trillion after having sold shares worth a combined ₹1.78 trillion in FY23 and FY22.

Tuesday’s rally to fresh highs was also spurred by FPIs cutting index futures cumulative shorts to just 3,718 contracts from 25,358 contracts a day earlier.

MSCI is a global index provider whose benchmark indices are used by global fund managers to allocate investments across global financial markets.