Foreign investors are flocking to the Indian capital markets in a big way with a net inflow of over USD 30 billion (more than Rs 2 lakh crore) of so-called ‘hot money’ in 2017, with equities alone getting over USD 8 billion — an amount bigger than the cumulative investment of the previous two years.

As the year draws to a close, the Indian stock market seems to have regained its status as one of the most favoured destinations for foreign portfolio investors (FPIs), as they have taken their net investment position in equities so far in 2017 to Rs 55,000 crore — the highest in three years after Rs 20,500 crore in 2016 and Rs 17,800 crore in 2015.

However, this remains a far cry from the heady levels seen earlier — Rs 97,000 crore in 2014, Rs 1.13 lakh crore in 2013 and Rs 1.28 lakh crore in 2012.

However, a sharper turnaround was seen in 2017 in terms of FPI inflows into debt markets where the net investments have soared to a staggering Rs 1.5 lakh crore (USD 23 billion) after a net outflow of about Rs 43,600 crore in 2016.

Marketmen, however, believe that this kind of FPI flows may not continue in 2018 as the withdrawal of liquidity and rate hikes in developed economies pick up. Also, the inflation cycle is likely to turn following increase in commodity prices and recovery in consumer demand.

The overall net inflow has made 2017 as the best period for Indian capital markets (equity and debt) in terms of overseas investment in three years with a combined net inflow of over Rs 2 lakh crore (more than USD 30 billion).

The higher inflow in 2017 compared to the previous two years could be attributed to an expectation of a pickup in the domestic economic growth, experts said.

“Although demonetisation and Goods and Services Tax (GST) implementation has met with initial short-term hurdles and impacted economic growth, it reinforced conviction in the government’s resolve in bringing economic reforms and so has the decision to recapitalise public-sector banks,” Himanshu Srivastava, senior analyst manager research at Morningstar India said.

Further, domestic markets, having witnessed a relatively subdued growth in 2015 and 2016, were well placed from valuation perspective compared to other markets, which also turned the attention of foreign investors towards India.

Besides, euphoric sentiment among corporates on account of improvement in ‘ease of doing business’ ranking coupled with the government showing commitment in speeding up development and economic reforms before going for elections in 2019 bode well for foreign investors’ confidence, said Dinesh Rohira, founder and chief executive at 5nance.com.

This year’s inflow has pushed FPIs’ cumulative net investment in the Indian equity market, since being allowed over two decades ago in November 1992, to Rs 8.75 lakh crore.

The cumulative figure for debt securities has also grown to Rs 4.2 lakh crore — taking the total for both debt and equities to Rs 13 lakh crore (USD 252 billion).

The capital poured in by FPIs is often called ‘hot money’ because of its unpredictability, but these overseas entities have still been among the most important drivers of Indian stock markets.

In terms of sectors, banking, housing finance and auto have seen consistent FPI inflows.

Moreover, PSU bank recapitalisation by the government has further boosted investor confidence in the financial services sector, Sharekhan AVP Research Lalitabh Shrivastava said.

It was not a good year to start with from the perspective of foreign flows in equities. FPIs, which were on a selling spree in the last three months of 2016, extended their sell stance to January 2017 as well.

However, things improved in February this year, which could be largely attributed to the Union Budget that provided much-needed clarity to well-regulated FPIs on capital gains taxation and tax on the indirect transfer.

Also, results of the five state elections reinstated such investors’ conviction in the government, as they indicated the greater certainty of reform implementation and growth returning in the Indian economy.

This has also helped March becoming the best month of 2017 when FPIs pumped in nearly Rs 31,000 crore. Thereafter, such inflow continued till July but the pace of capital infusion slowed down.

FPIs did take a break from buying and turned set sellers in August and September, pulling out over Rs 24,000 crore during that period. This could be attributed to risk aversion due to increased geopolitical tension arising on the back of stiff stand-off between the US and North Korea, below expectation growth in the domestic economy and profit booking.

Overseas investors reversed the selling trend in October and positive momentum continued in November when FPIs made their second highest monthly net flows for 2017 after March.

This inflow was boosted by government’s decision to recapitalise PSU banks, which is expected to enhance lending and propel economic growth, coupled with news about India faring well in the World Bank’s ease of doing the business index.

However, FPIs have again started selling in December as rising crude prices and widening fiscal deficit prompted them to adopt a cautious stance.

With regard to the debt market, FPIs started the year on a negative note but infused money in February and their bullish stance has largely continued since then.

“In the last two years, the real rate had been relatively high in India which coupled with the stable currency attracted foreigners into debt markets,” Quantum MF Fund Manager-Fixed Income Pankaj Pathak said.

Going ahead, Pathak believes 2018 would not be the same when it comes to investment by FPIs as “withdrawal of liquidity and rate hikes in developed economies pick up.”

“Given 2019 would not be far, the expectation of some other economic reforms from the government would be high. But the major for FPIs going ahead would be to see growth coming back in the domestic economy, which has not yet picked up contrary to the expectation,” Srivastava said.

“On a more short-term note, Gujarat election results would also be crucial which would indicate the popularity of the current government and prospects of future economic reforms,” he added.