Foreign Money is Dominating the Indian Stock Market. What Happens Next?

The Indian stock market is looking very strong. The Nifty hit a new all-time high on Friday and did not look back. It has been on a record-breaking spree since.

The Sensex is within touching distance of 70,000. The Nifty is close to 21,000.

The broader market of midcaps and smallcaps is on fire too as is the primary market. Every IPO is massively oversubscribed and listing at huge premiums, especially in the SME IPO segment.

Sentiment among investors and traders is extremely bullish. The state election results have proved to be the booster shot the Indian market needed.

Now all these reasons would be enough to take the markets even higher. But recently, there has been yet another positive development: Foreign investors are buying Indian stocks.

For quite some time now, it has been the Indian retail investor that has driven the market. Steadily rising SIP investments have held the market aloft in the face of a lot of volatility in global markets.

But now there are early signs that foreign investors are coming back to Indian stocks. This holds the potential to turbocharge the stock market.

It's still early days so there is no definitive trend yet. However, there has been a change in FII activity since the last week of November. Buying has consistently exceeded selling.

The initial data for this week too is positive. FIIs have not slowed down their purchases.

Now we must not read too much into this. Over the past two years, there have been instances of a week or two when FIIs bought Indian stocks, only to then turn sellers.

But this time could be different. Foreign funds do seem to be buying is significant quantities. And there isn't much FII selling to be seen.

This is great news for all those who have patiently held on to their stocks through the volatility of the last two years. Their portfolios would be in the green by now.

It's also great news for anyone who has entered (or re-entered) the market recently. These investors have enjoyed some quick profits.

So, let's look at the key reasons for the change in sentiment among FIIs and how Indian investors should react to the same.

#1 Falling US Bond Yields

One of the main reasons why emerging markets including India faced intense selling pressure from foreign investors was the rising yield on the benchmark US government 10-year bond.

The US 10-year bond yield, which represents the interest rate on 10-year US government bonds. It's closely monitored by investors worldwide as it serves as a key benchmark for assessing market sentiment and making investment decisions.

The US 10-year is the benchmark for global asset prices. This is because it's considered to be the ultimate risk-free asset. All 'risky' assets, like stocks for example, have a co-relation to it.

The yield had hit 5% in October 2023, the highest level since 2007. However, since then the 10-yield has cooled off. It's now trading at around 4.2%, a big decline.

This has provided much relief to global investors and fund managers. A falling US 10-year yield is associated with bullish rallies in emerging market stocks and vice versa. Thus, the Indian market has benefited from the same.

#2 Falling Crude Oil Prices

The price of crude oil has been falling since September 2023 but the pace of the decline picked up towards the end of last month.

The tentative peace deal in the Israel-Hamas war was a welcome sign for stock markets but negative for oil prices. There have also been some tentative signs of a potential deal to end the Russia-Ukraine war. If true, this would be extremely bullish for stocks.

As per the latest news, Saudi Arabia, the world's largest oil producer, has begun offering discounts to Asian nations to ensure it doesn't lose market share.

The oil inventory data from the US also indicates near record high levels. All this is very bearish for crude oil and very bullish for large oil consuming nations like India.

#3 State Election Results

It goes without saying that political stability is important to foreign investors.

There isn't a doubt that they want the current government win next year's general elections. The state election results have provided them with the assurance that the Modi government will stay in power.

This would have prompted some foreign investors to loosen their purses a bit.

What's the Best Course of Action Now?

Most investors and traders are expecting blue skies ahead. Domestic investors never sold and kept buying, and now foreign investors are coming back too.

The market sentiment is so strong that even the most die-hard bear has probably given up by now.

So, do you throw caution to the wind and go all in on the market? Or should you start thinking of selling? Or should you do nothing and just hold on to your portfolio as it is?

Well, this is what we had written to our readers a while back and we stand by it...

• If we do see a new all-time high, and the market goes even higher, should you abandon your long-term investing strategy and try to make quick profits?
  
  Well, you would be tempted of course. The more you see others make easy money in speculative stocks, the more you will feel like doing the same.
  
  It's called FOMO or fear of missing out. It's a dangerous emotion that can consume the minds of investors and make them lose their rationality. We saw it in full effect in the bull market of 2020-21. We could see it again.
  
  Such a scenario, if not accompanied by regular corrections to keep the market's enthusiasm in check, could result in a euphoric market in which prices go up just because everyone expects them to go up.
  
  This stage usually signals the end of bull markets. We would prefer the markets to move up in a calm and orderly manner so that investors find good quality stocks to buy at reasonable valuations.
  
  However, that's not how human emotions work. Just remember, if we do see a new all-time high, and further gains after that, you should become more cautious and not more enthusiastic.

We conclude this piece with a quote from the most successful investor of all time...

• 'A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street (a community in which quality control is not prized) will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.' - Warren Buffett

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...