Bernstein analyzes the prospects of foreign institutional investors returning to the Indian stock market

Bernstein analysts noted that Foreign Institutional Investors (FIIs), who withdrew nearly $40 billion from Indian stocks over the past two years, have little basis for long-term investment in India. However, according to them, they might return to the market for short-term trading.

In a joint note prepared under the guidance of brokerage firm Managing Director Venugopal Harre and Nikhil Arela, Bernstein analysts pointed out that the arguments for structural capital allocation in India have become more complex due to issues with large companies whose business models face challenges from new technologies, and small and medium-sized enterprises (SMIDs) are difficult for institutional investors to access.

Bernstein forecasts that over the next twelve months, the inflow of FIIs is likely to remain stable or show moderate growth, despite the significant outflow over the last two years. This forecast is primarily based on the weakening of recent negative factors, rather than a substantial improvement in the structural elements affecting the long-term placement of foreign capital.

Harre and Arela emphasized that India's promise as a 'bright spot' is becoming less significant, given that the Nifty index has shown only about 6% annually in US dollars over the last decade and demonstrated an almost 11% annual decline over the last two years.

Outdated Economic Era

According to the Bernstein report, the flows of domestic and foreign institutions into India demonstrate cyclicity. A typical cycle includes 2-3 years of foreign capital inflow, followed by a year of low activity when domestic institutional investors (DIIs) peak, and FIIs either take profits or do not deploy funds.

The peak volume for FIIs was around $25 billion per year, whereas for DIIs it was lower—approximately $15-20 billion annually. Bernstein noted that there were rare instances when both types of investors acted as major buyers, the most recent such instance being 2023.

Another issue highlighted by Bernstein analysts is the nature of large Indian companies, which they believe represent an 'outdated economic era.' Most of these companies, it is argued, are engaged in consolidating their past rather than investing in the future, often relying on policy to continue protecting them from global competition.

Bernstein explained that one reason India struggles to scale in new technologies such as electric vehicles (EVs), semiconductors, and solar energy is the unwillingness of companies with large financial reserves to allocate capital. If large companies cannot ensure necessary growth, FIIs are forced to turn to SMIDs. However, separating quality assets from noise and identifying future giants requires specialized teams, dedicated resources, and a long investment horizon.

Most SMIDs, according to Harre and Arela, remain underdeveloped, characterized by low free float, limited liquidity, and sparse coverage, making them an imperfect destination for large institutional capital. They added that flows are often driven by news without strong fundamentals, and the same market that rewards a positive narrative heavily punishes upon disappointment in quarterly results. By the time a small number of winners become truly investable, most of the value creation is already behind them.

Artificial Intelligence Trading

Bernstein also stated that the peak of Artificial Intelligence (AI) trading in global markets, if it occurs at all, does not offer great hope for the return of flows to Indian markets. Analysts believe that global capital was never intended for chasing annuity-like returns when taking risks related to valuation, liquidity, and execution, which are increasingly present in parts of the Indian market.

In conclusion, Harre and Arela wrote that the structural revival of foreign inflows will depend on India's ability to create globally competitive industries in new areas: for example, advanced semiconductor manufacturing instead of mere assembly, deep capabilities in battery and energy storage, increasing energy self-sufficiency, and developing business models capable of capturing a significant share of the global market.

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www.aajtak.inSeptember 19, 12:12

Ashwini Vaishnaw stated that India is rapidly becoming a semiconductor manufacturing hub

Union Minister Ashwini Vaishnaw noted that the history of the semiconductor industry's development in India has been quite fascinating. Initially, there were significant doubts regarding this sector, but the government's clear vision and honesty allowed these concerns to turn into reality.

During a meeting with CEOs of global semiconductor companies, the Union Minister presented them with the current state of affairs in the country with great respect.

www.aajtak.inSeptember 17, 04:43

US Interest Rate Hike and Potential Impact on the Indian Economy

The Central Bank of America, the Federal Reserve, raised interest rates by 25 basis points, bringing the federal funds rate to a range of 3.75% to 4%. This is the first rate hike in over three years.

This decision by the US has significant implications for India as it can affect the Indian rupee, foreign investments, the stock market, bonds, and crude oil prices. Simply put, higher rates in America make investments there more attractive, which could lead to capital outflow from markets like India towards American assets.

Following the Fed's rate hike, attention will initially focus on the rupee. Generally, rising interest rates in the US strengthen the dollar. A stronger dollar puts pressure on the rupee, meaning more rupees may be required to purchase one dollar. This can affect the cost of goods needed by India, as many are paid for in dollars, such as crude oil. If the rupee weakens and the price of crude oil rises, this will increase inflationary pressure in the country and widen the import bill.

High Fed interest rates can make American investments more appealing to foreign investors. This increases the risk of foreign capital outflow from emerging markets like India. According to data from the National Securities Depository Limited (NSDL) of India, foreign investors have already sold Indian company shares worth about 2.41 lakh crore this year. If the Fed continues to raise rates or signals maintaining high rates for an extended period, selling pressure from foreign investors may persist, affecting stock market dynamics.

Increased selling by foreign investors can put pressure on the Indian stock market, especially on stocks with a high foreign investor stake. However, the Fed's decision is not the only factor influencing the market. Market direction is also determined by the performance of domestic companies, India's economic growth, inflation, and the Reserve Bank of India's (RBI) stance on interest rates. Therefore, the Fed's rate hike does not guarantee an inevitable fall in the Indian stock market; the real effect will depend on the future actions of foreign investors and Fed signals in the coming months.

Monitoring crude oil prices also remains important after the Fed's decision. India imports over 80% of its crude oil needs, so rising international oil prices directly impact India's import expenditure. If the dollar strengthens and oil prices rise, purchasing crude oil for India could become even more expensive. This could affect not only gasoline and diesel prices but also transportation and other goods costs. Amid ongoing tensions in the Middle East, there is already uncertainty regarding oil prices, making the movement of oil and rupee prices in the near term extremely crucial for India.

After the US Fed's decision, close attention will be paid to the position of the Reserve Bank of India (RBI). When setting interest rates, the RBI considers not only the US but also numerous other factors such as inflation in India, economic growth, the state of the rupee, and money demand in the country. Nevertheless, if US interest rates remain high and the dollar strengthens, the RBI may face the challenge of managing pressure on the rupee and foreign capital. If the RBI also raises interest rates, it will directly affect borrowing costs for ordinary citizens and businesses, as mortgage, personal, and business loan rates may increase, putting pressure on monthly installments (EMI).

The Fed's decision can also influence gold and silver prices. On Wednesday, gold traded at ₹1,51,850 per 10 grams on MCX, and silver at ₹2,35,421 per kilogram. Gold showed a rise of ₹1,040, and silver rose by ₹3,303, recovering after a three-week decline. The market attributes this to bargain hunting and attempts at short covering. However, the future trajectory of gold will largely depend on how hawkish the Fed's stance remains.

The Fed not only decided to raise the current rate but also hinted at a possible further increase later this year. This means that hopes for a near-term reduction in US rates may weaken. The US central bank's decision was made against a backdrop of persistently high inflation in America, Middle East tensions, and a strong labor market. The goal of the American central bank is to bring inflation closer to the target level of 2 percent.

This Fed decision differs from the demands of US President Donald Trump, who has repeatedly called on the Fed to lower interest rates, stating that...

www.aajtak.inSeptember 15, 05:57

US Markets Show Volatility, While Gift Nifty Gives Positive Signals for Indian Stock Market

Last week, the Indian stock market experienced a significant decline. Trading was suspended on Monday due to the Ganesh Chaturthi holiday. Meanwhile, global markets, from the US to Japan, witnessed serious turmoil.

Sharp declines were recorded in American markets, including the Dow Jones and Nasdaq, which closed in negative territory. Consequently, analysts are examining what signals are being received for Sensex-Nifty from foreign markets such as Japan, Hong Kong, and South Korea.

During the last trading day, American stock markets appeared extremely unstable, showing fluctuations from opening to closing. The most significant factor contributing to the decline in the US market was the aggressive sell-off of artificial intelligence (AI) related stocks. Shares of major AI companies collapsed. Stocks of firms like Samsung, Nvidia chip manufacturer, SoftBank, and semiconductor companies fell by 4% to 10%.

Due to the crash in AI stocks, the Nasdaq index dropped by one percent but ultimately closed at 26,186, losing 147 points. As for the Dow Jones, a substantial drop was also noted, with the index ending trading at 52,421, down by 152 points. Furthermore, the S&P 500 closed in negative territory, losing 37 points.

Not only did American markets show a sharp decline; chaos reigned in many Asian markets on Monday as well. During trading, the Japanese Nikkei fell by more than 500 points, the Korean KOSPI by more than 250 points, and the Taiwanese stock market by 322 points.

The Indian stock market will open today after the holiday. Analysis of external signals indicates that although negative signals are coming from America, many Asian markets, as well as Gift Nifty, point towards a possible acceleration of Sensex-Nifty on Tuesday.

At the time of writing, Gift Nifty, considered a key indicator for the Indian stock market, was trading up by more than 60 points. Additionally, the Japanese Nikkei recovered after a sharp fall on Monday, showing a rise of about 600 points. There was also an increase in the South Korean KOSPI index. The UK's FTSE-100 index was also trading in positive territory.

Last week, the Indian stock market experienced a significant downturn. Throughout the week, both major indices, Sensex and Nifty, were in a decline of more than 2%. By the end-of-week trading results, the Sensex BSE, comprising 30 stocks, closed at 74,781, down by 120 points, while the NSE Nifty finished at 23,398, losing 80 points.