FII Flows India: Recovery Expected as Risk Aversion Eases

FPI Flows & Quarterly Earnings Trends: A Summary & Outlook (Next 12-18 Months)

Here’s a breakdown of the key takeaways regarding FPI flows and quarterly earnings trends, based on the provided text, with a focus on the next 12-18 months:

1. Current Situation & Recent Trends:

* FPI Outflows: Notable FII outflows of INR 850 billion have occurred over the past three months, despite market stability.
* Market Stability: Indian stock markets have remained relatively stable despite these outflows and challenges like US tariffs and geopolitical instability. This stability is attributed to favorable monsoons and rising domestic consumption.
* Weak Relative Performance: indian markets have substantially underperformed global and emerging markets (down 23% & 26% respectively in USD terms over the last year) – the worst performance in 15-20 years. This is linked to weak earnings momentum and currency depreciation.
* RBI support: The RBI has been proactively pro-growth with low rates, increased liquidity, and eased lending rules. The effects of these policies are expected to materialize soon.
* Government Spending: GOI capital expenditure increased by 43% in the first five months of 2025, but future increases depend on further allocation.

2. Earnings Trends (Next 2 Years):

* Positive Outlook: A broad earnings recovery is anticipated in the next 1-2 quarters, driven by:
* Normal monsoons
* Controlled inflation
* interest rate cuts (100 basis points already implemented)
* reduced GST rates
* Tax relief measures
* Robust demand during festival and wedding seasons
* Implementation of the 8th Pay Commission (2026)
* Sectoral Performance (Bloomberg Consensus Estimates):

* Outperformers (CAGR 15-25%): Capital Markets, Capital Goods, Consumer Discretionary, Auto, New Age Platform Companies, Travel (hotels, aviation), Defense, Power, Cement.
* Neutral/Caution:

* FMCG & IT: Corrected but still trading at high valuations not justified by current earnings growth. Need significant earnings growth to sustain valuations.
* Banking: Slowdown in recent quarters, but potentially nearing a bottom. Headwinds are clearing due to RBI policies.

3. FPI Flow Outlook (Next 12-18 Months):

* Positive Turnaround expected: FPI flows are “poised for a comeback.” The “wall of worry” is diminishing.
* Key Drivers for Inflows:

* Macro Stability: India’s strong GDP growth (above 6.5%), contained fiscal deficit, and controlled inflation are attractive compared to other emerging markets.
* Resolution of Trade Issues: Progress on tariff talks with the US.
* Fading US Rate Hike Fears: reduced concerns about further US interest rate increases.
* Valuation Appeal: The recent underperformance has created a more attractive valuation proposition.
* Earnings Growth: The anticipated pick-up in earnings growth is a crucial catalyst.

In essence,the outlook is optimistic. The report suggests that the worst of the FPI outflows may be over, and a recovery in inflows is likely as earnings growth accelerates and macroeconomic conditions remain favorable.