Foreign Money Returns to Indian Equities, Lifting Small-Caps While IT Stocks Pause

Synopsis

Foreign investors have pulled in about $8 billion in equities trading during November, the biggest such inflow in a month since December 2020, as they shifted out of deals involving artificial intelligence. Small cap stocks have rallied 3.6 per cent and mid cap group stocks have increased by 2.1 per cent in the week, while the Nifty IT index declined 3.2 per cent. The State Bank of India rose 6 per cent on result while Paytm ended at a record high on preliminary RBI approval.

Investment inflows have helped Indian stocks so far in November, bringing the total to the highest since December 2020, at about dollar 8 billion. The flows are attributed to unwinding of AI trades and declining oil prices, Reuters notes.

The size of the turnaround

The turnaround has come quickly. Foreign institutional investors saw net inflows of ₹45,960 crore in the week ending Nov. 6 compared with net withdrawals of more than ₹45,000 crore in the previous week. They purchased close to ₹15,000 crore on Thursday, November 5, for the first time in nearly six years, as funds moved away from AI-related US technology due to faltering results on the Qualcomm chipset and the Nasdaq plummeted 5.5 per cent. The Nifty rose by 8.58 per cent during the week.

Since November 4, SBI Research estimates that the rupee has appreciated by 0.7 per cent and the inflows totalled around $7.68 billion.

Changes in the wider markets and in the sector

The gains weren't limited to the big stocks this week. The small-caps index gained 3.6 per cent and the mid-caps gained 2.1 per cent while the Nifty 50 and Sensex moved up 0.5 and 0.7 per cent, respectively. 13 of 16 key sectors rose in the week.

The only exception was technology. This week's drop in the IT index reversed six weeks of gains, which are said to have been driven by AI-related trades, as investors moved away from those positions. That same downward trend that drove foreign capital towards Indian stocks diverted it from Indian IT.

Company moves

State Bank of India climbed 6 per cent this week, continuing a trend of a rally on back of positive quarterly results. Paytm's stock reached a new record high after its payments services arm has been granted interim approval to launch prepaid payment products by the RBI. The overall trend is banking: the Bank Nifty rose around 8 per cent in the week ending on Nov. 6.

Risks that remain

The condition of the domestic side is not as pleasant as the flows indicate. 6.09 per cent retail inflation and expectation of a repo rate hike in December were the negative influences during the Friday trading session.

The inflows are also linked to external factors, like the unwind of AI-trade and declining oil. If those factors reverse, such flows can reverse, and in Thursday's trading, Brent went up 3.3 per cent to $95.82. The week ended with the Nifty at 25,144.30 and the Sensex at 81,592.45.

Outlook

Foreign funds have been doing most of the work this month. That will be addressed at the Reserve Bank's meeting on 2-4 December, which will be partially aimed at deciding whether domestic conditions will allow that to remain.