One-way rush on D-Street! FPIs can’t afford to stay away from peak growth

FPIs are back in the market, hoisting Sensex above 80k in the index’s fastest 10,000-point rally. There is reason to believe FPIs are here to stay, and their pullout in May and June was a blip, not the trend. Uncertainty over election results is behind us, and the process of ministry formation provides investors assurance of policy continuity.

The maiden budget later this month is expected to set a reform roadmap over the next five years, while persisting with fiscal prudence. The earnings season is likely to bear out that India is a market FPIs can’t afford to stay away from. Few other emerging markets can match India’s projected 7.2% GDP growth and, hence, earnings, although valuations are looking stretched.

Return of FPIs is causing a rotation in favour of large caps. Domestic investors have been pushing the broader market, raising regulatory concerns over froth in mid and small caps. These concerns should subside as large caps catch up in valuations.

The up move from 70,000 to 80,000 has been restricted to just over half the Sensex constituents and should widen as earnings visibility improves across sectors on budget proposals and monsoon prospects.

Easing of interest rates by central banks in advanced economies later this year will open the arbitrage opportunity Indian equity has to offer. Also, improving the trade balance eases pressure on the rupee, adding extra returns to FPIs’ India exposure. So long as energy prices remain subdued, there is no major catalyst for FPI to alter their India perspective. Unless other emerging markets can match up to the risk-reward metric, which India has worked on by encouraging debt flows. Sensex at 100k may be closer than what investors had anticipated earlier.