The Indian economy is going through its worst crisis in recent history. Yet, foreign investors have not batted an eyelid.
Since November 1, foreign investors have poured a staggering Rs 1 lakh crore ($14 billion) into Indian stock markets.
A combination of low interest rates in the United States and the weak dollar has led to inflows into emerging markets like India. Low-interest rates mean the returns on US Treasurys are subdued and hence foreign investors prefer Indian stock markets, where the return could be relatively higher.
In November, the inflows from foreign investors were at a record high. And in contrast, the domestic mutual fund industry was a net seller (sold more shares than it bought).
Driven by the inflow from foreign players, the market has continued to hit new heights. “The rally was propelled by strong FII [foreign institutional investors] inflows, good corporate earnings season, and trends from the festive season, which suggests that the demand recovery continues,” brokerage firm Motilal Oswal said in a report dated December 4.
Even the big global firms like Morgan Stanley and Goldman Sachs have turned bullish on India, citing factors such as accommodative monetary policy, government spending, and peaking out of Covid-19 infections.
But there are also a lot of factors that could prick the pricey bubble of Indian markets. Inflation is still a bone of contention and could hurt the Indian central bank’s attempts to keep the rates low. At the same time, the recovery in demand has been slow with the imports and credit growth showing signs of weakness.
In fact, veteran investors like Shankar Sharma of international investment firm First Global are advising caution. “The probability of this being a suckers’ rally, where all kinds of beaten-down stocks have begun to rally sharply, should be a time to be cautious and circumspect,” Sharma told Rediff.com in an interview.
This article first appeared on Quartz.