After driving the initial rally, FIIs have sold during the last three sessions. India’s forex reserves touched a record high.
The market is turning volatile once again with headline indices continuing to correct after closing in red for the last week.
With every correction, the murmurs get louder about the impending second wave of correction. The market threatened to do so on multiple occasions in the last couple of months. However, it has managed to avert that so far.
Foreign Institutional Investors drive rally:
After hitting the bottom at 7,500 in March, Nifty managed to climb back up to 10,300 despite the gloomy economy. Without a doubt, the FII inflows have kept the market up. After witnessing massive outflows of USD 8.4b in Mar'20, FIIs have turned positive with an inflow of USD 4.4b since Apr'20.
This is largely driven by the abundant supply of global liquidity and declining interest rates. Overall, FII flow in India has accelerated post the announcement of corporate tax cuts in Sep'19. Recorded inflows for six consecutive months till Feb'20 was at USD8.8 bn.
Forex Reserves: India has come a long way
There was a time in 1991 when India had to pledge its gold reserves to avoid a major financial crisis. Call it a fruit of liberalization or untiring efforts of Indians, India’s forex reserves have crossed $500 billion for the first time twenty years later.
It is important to note that since the announcement of lockdown in March, India's forex reserve has surged by $31.8 billion. The major reason for the rise in forex reserves is the increasing investment of foreign portfolio investors in Indian stocks and foreign direct investments (FDIs).
Cheap crude and a sharp cut in foreign travels have also saved a lot of forex in the last few months.
Key takeaway:
The rising forex reserves give a lot of comfort to the government and the RBI to handle India’s external and internal financial issues. It would also help the rupee to strengthen against the dollar. Its importance is even higher at a time like this when the economic growth is set to contract by 1.5-2.0% in 2020-21.
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