Lok Sabha Elections: How Foreign Investors Navigated The Last Five Polls

During general election years, there tends to be a notable trend with foreign institutional investors and their investment behaviour. Looking back at the past five Lok Sabha poll cycles, foreign institutional investors have generally shown a positive inclination towards the Indian market in the pre-election quarter, with the exception occurring only in 2009 because of the global market conditions post the Lehman crisis.

This year, the trend is palpable with foreign institutional investors already injecting Rs 6,851crore in equities into the market so far. This influx of capital marks a reversal from the trends observed in January and February.

The primary markets have seen an inflow of Rs 15,816.75 crore so far in 2024, according to data from the National Securities Depository Ltd.

It is noteworthy that foreign portfolio investment as a percentage of market capitalisation is currently at its lowest, indicating a potential upward trajectory from this point onwards. This suggests that the FPIs are presently underinvested in India, according to Ritesh Bhansali, director at Mecklai Financial Services Pvt.

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In March so far, foreign portfolio investors have infused Rs 38,098 crore into Indian equities after shifting from a selling streak to becoming buyers in 2024.

The reported FPI figures incorporate certain bulk transactions conducted through stock exchanges, which may not accurately reflect the entirety of FPI activity, according to market watchers.

The last general election in 2019 saw the highest inflow in the last five election cycles. The outcome of the election was, as widely expected, a second term of the Narendra Modi government.

The Year Gone By

The Indian stock market has gained over 30% in the last 12 months leading up to the upcoming general elections. During this period, the market sentiment has been buoyed by expectations of political stability, coupled with optimism surrounding the initial stages of a capital expenditure cycle.

"If the incumbent government secures a strong majority in the election, India can expect significant foreign inflows. Undoubtedly, the majority of these inflows will gravitate towards large-cap stocks, which are consequently likely to experience a more decisive re-rating after the election, according to Saurabh Mukherjea, founder of Marcellus Investment Managers.

Mukherjea anticipates substantial flows from foreign institutional investors throughout the remainder of this calendar year and into the next financial year.

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Post-Election Quarter

A quick check of how the markets have behaved in the last four elections shows that it was only in 2019 when an outflow of funds was witnessed.

The second quarter following the announcement of results in May 2019 saw an outflow totaling Rs 22,463 crore. In contrast, the years 2014, 2009, and 2004 all saw inflows of funds during this period too.

Analysts' Views

The FPIs are anticipated to bring in robust inflows after the election. Nonetheless, they may be currently holding back, awaiting a correction in Indian equity markets before engaging aggressively, according to Ritesh Bhansali, director at Mecklai Financial Services Pvt. "Also, the ongoing strength in US and Japan equity markets, along with better valuations in rest of Asian markets, are holding them from committing in Indian equity markets."

Following the elections, sectors like real estate, capital expenditure and energy are expected to experience significant inflows, he added.

Starting June 28, India to enter JP Morgan's widely tracked Government Bond Index-Emerging Markets, which is expected to inject approximately $2 billion monthly into the country, Anil Bhansali, executive director at Finrex Treasury Advisors. "The influx of investment in bonds is primarily driven by front-running for the fund, and this trend is expected to escalate over time."

"The only risk for investment in India by (the) FPIs is an adverse result in the polls, which could affect the flows. Else, flows should keep increasing with the main emphasis on debt, where (the) 10 year is still yielding about 7.08% and no rate cuts have been factored in," he said.

"I expect inflows to be to the extent of $35 billion in 2024 in both debt and equities with emphasis on debt."

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