For the last month or so, foreign investors have been positive on India after the fall in crude oil and gold prices, but this belief turned into a conviction rally after April's inflation data came in and hopes of a rate cut strengthened. Barclays, which met over 50 investors across Europe and the US, says overall interest in India remains high. What is driving this rally is the belief that the fall in crude and gold prices will improve the twin deficits (fiscal and current account). Inflation too, would come off by 50 basis points (bps) or so on lower fuel prices. These factors put together are a recipe for another rate cut, is what the market believes. After April WPI inflation dropped to 4.9 per cent, Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, is expecting a second 25 bps rate cut in July after the one in June 17.
Consequently, foreign ownership in Sensex stocks has gone up to the highest level in the last eight years, while promoter shareholding has dipped to its lowest. Bank of America Merrill Lynch says FIIs had shown huge interest in Indian markets during the quarter and bought across all sectors.
So, what are FIIs betting on? If the market is betting on rate cuts, then the rate sensitives are obviously back in favour. Wednesday's rally has been largely driven by banks and autos. Financials and autos continue to be the biggest overweight for FIIs, claim strategists. Clearly, their bets are paying off, as both these sectors benefit hugely if the central bank continues to cut rates. Barclays says concerns over gross domestic product growth forces global investors to maintain a cautious stance on cyclical sectors. Most investors that Barclays met are holding on to their underweight position in industrials and materials. Along with cyclical, consumer staples are out of favour, too. This is yet another instance of a rally where domestic investors have been left out.