The article highlights the positive upward trend of the Sensex post Union Budget 2021-22 and attributes this success to increased Foreign Portfolio Investments (FPIs). The Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE) in India. As a reflection of the Indian financial sector, it consists of 30 of the largest and most actively traded stocks in the country. Corporations issue stocks as an investment that represents a share or partial ownership in the company, helping them raise funds for their operations.
Reasons for Increased FPI Inflow
The upward surge observed in the stock market can be attributed to increased liquidity post Union Budget 2021-22. The budget has proved to be pro-growth, bringing privatization into limelight, and infusing more money supply into the Indian economy. Key reforms focusing on shareholder rights and business ease have also added to this positive growth.
Post Covid Recovery Impact
With the economy steadily recovering, India is resuming a higher growth trajectory compared to the struggling Western world, grappling with the second wave of Covid and related lockdowns. It has positioned India as a credible destination for investors seeking growth.
Sector-specific Investment Trends
Certain sectors such as private banks, Fast-Moving Consumer Goods (FMCG), and Information Technology (IT) have seen robust foreign flows as these companies demonstrated resilience and impressive growth in the post-lockdown phase. Despite the banking stocks underperforming due to potential Non-Performing Asset (NPA) concerns, they are once again in demand among the FPIs.
Impact: Building Forex Reserves
Increase in investments allows for conservative building of forex reserves. This serves as a protective buffer in maintaining economic resilience in face of any future contagion arising from excessive liquidity and increasing fiscal deficits.
Understanding Foreign Portfolio Investment
FPI and Foreign Direct Investment (FDI) are both essential sources of funding for economies. While FDI involves buying direct business interests in a foreign country, FPI comprises securities and other financial assets held by foreign investors. It’s known as “hot money” because of its tendency to withdraw at the first sign of trouble in an economy. It is relatively liquid depending on market volatility and includes stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts (ADRs), and Global Depositary Receipts (GDRs).
Other Important Details Relating to FPI
FPI forms part of a country’s capital account and is reflected in its Balance of Payments (BOP), which quantifies monetary flow between nations over a financial year. The Securities and Exchange Board of India (SEBI) introduced new FPI Regulations in 2019, replacing the previous regulations of 2014. Despite its benefits, FPI is more liquid, volatile, and therefore carries a higher risk than FDI.
