However, since this is a meaningful weight increase, significant flows from active managers should also be expected. Many managers have tracking error-based risk budgets, which would induce taking cognizance of increased country weight.
Besides, every active manager strives to generate alpha and if the relative position changes as a consequence of benchmark change, the manager would readjust. As much as 87% of FPI flows into India have come from non-India dedicated active managers, and hence, flows from active managers should be multiples of passive flows.
While passive flows are linked to the date of index changes, active managers could have been buying since the change got shared or even before. In October, many emerging markets saw outflows while India got inflows. In November, many other emerging markets saw large inflows even though they may not have seen any index change.
The index is but one reason for seeing a surge in flows. Other reasons could be improvement in economic scenario post COVID-19 and the strong result season apart from High liquidity infusion by central banks, which could now be creeping in.
Because of index changes while passive flows could have been around $2.5 billion, active flows could be around 6x of the same given that 87% of the money flow into India is from non-India dedicated active funds. The country has not seen this kind of money flowing in as yet (even in this calendar as a whole or a part of it) and hence it is probably right to expect continued fund flow going forward as well.
India has seen much higher consistency in FPI flows in comparison to other emerging markets. This should continue to be the case going forward because businesses in other emerging markets (barring China) cannot hope to attain scale that businesses in India would attain. The ability of the country to absorb large flows is also there as are investible assets.
These factors make India a very compelling story for any long-term investor (FDI or FII), a story with a potential that none other can match. The march of globalisation has slowed down on account of COVID-19, maybe even reversed. The border situation has helped increase awareness about improving domestic manufacturing capabilities.
The government policy is becoming very favourable for Make in India and production-linked Incentives are being extended for multiple sectors. The Indian market is gradually being made more available for Indian enterprises whatever may be the ownership of the asset. The world would recognise this fact and invest accordingly.
People compare valuations across geographies and many a times believe Indian valuations are higher. However, let us take an example to understand this. For example, how large can a cement business be in any country? Wouldn’t the growth opportunity for such a business be over at a level of say 50mt for most countries in the world? India, apart from China, offers a scale that most other countries cannot imagine.
India has individual cement companies that make and sell over a 50mt of cement in India itself and are probably looking at growth accelerating in future. India used to make around 25mtpa of steel in late 90s and now does over 120mtpa and has converted itself into one of largest steel producers globally and so on. Same story has been repeated in autos.
We are seeing new age businesses come up and attain a unicorn status and every year numbers grow strongly. These examples are just to make the point about the sustained growth potential of the country.
With such growth opportunities, higher valuations should be expected to sustain. We are a capital hungry nation. Lot of flows can be absorbed to propel growth. In fact, new issuance of capital in the past matched the offshore flows quite closely. It is in periods like what we have seen during the Oct-Nov period, when new issuances were low, that the strong flows had a good positive impact on the market.
Strong secondary market flows from FPIs should set off a chain reaction. The inflow of FPI money would come into the hands of domestic investors who would then use most of the money to again buy some other stock. This should keep the breadth of the market good and increase the ability of active managers to generate alpha.