The Indian financial services space seems to be in a sweet spot as foreign investors have made a net investment of Rs 14,205 crore ($2.1 billion) in the sector in November amid strong credit growth and manageable non-performing loan portfolio.
The investment comes following a net withdrawal of Rs 4,686 crore from financial services stocks in October on account of profit booking.
Overall, foreign portfolio investors (FPIs) have made a net investment of Rs 36,238 crore in the country's equity markets in November.
Of this, the financial services sector attracted Rs 14,205 crore, which accounts 39 per cent of total investment made by FPIs in equities, data with National Securities Depository Limited (NSDL) showed.
Most of the buying was concentrated in the first half of the month of November 2022.
Manish Chowdhury, head of research at Stoxbox, said the financial services sector is coming out of a lean period and is doing well due to a strong uptick in loan growth and manageable non-performing loan portfolio.
"We believe that an expected acceleration in capex spending should ultimately trickle down to enhanced incomes which would open opportunities on a wide range of financing frontiers including housing, vehicle, SME, etc.
"The margins of these companies should also benefit from low-cost deposits garnered earlier," he added.
Rajiv Bajaj, chairman and MD, Bajaj Capital, said that credit growth has moved up 17 per cent and corporate capex, which was at a decadal low, is showing signs of a gradual pickup and initial signs are encouraging.
"Building blocks seem to be in place for robust upturn in the economy over the coming 2-3 years.
"The BFSI segment is likely to be a key beneficiary of it.
"Now they are entering into an earnings acceleration cycle after a long time.
"So, this segment is expected to remain the favorite for FPIs," he added.
At the end of November, assets under custody of the financial services sector stood at Rs 16.13 lakh crore.
After the financial services stocks, fast moving consumer goods (FMCG) emerged as the second most preferred sector with a net investment of Rs 3,956 crore.
The inflow was mainly driven by steady consumption.
"Consumption stocks are drawing inflows amid steady private consumption in Urban India and expectations of a revival in rural demand given the healthy sowing of the Rabi crop," Hitesh Jain, Lead Analyst - Institutional Equities at YES Securities, said.
According to Bajaj, commodity prices have fallen sharply in recent times which may have reduced the input cost for the FMCG company that could translate into expansion in margin for this segment.
The FMCG sector was followed by information technology at Rs 3,859 crore, auto at Rs 3,051 crore and oil, and gas sector at Rs 2,774 crore.
"IT companies remain attractive for FPIs given the under-ownership and considerable dilution in the valuation of IT stocks," YES Securities' Jain said.
On the other hand, consumer durables saw the maximum selling by FPIs in November at Rs 1,275 crore.
Besides, power and telecommunications witnessed sales of Rs 1,100 crore and Rs 1,084 crore respectively.
As far as overall FPI flows are concerned in the equity markets, Bajaj believes it will depend upon the US Federal Reserve's policy meeting which is scheduled on December 13-14.
However, risk-on sentiments seem to have improved recently as prospects of rapid quantitative tightening cycle have receded amidst fallen bond yields.
India's outperformance is expected to continue going forward as the US, Europe and China continue to grapple with their own problems including high inflation, possibility of slowdown in economic growth, energy and supply chain imbalances, Stoxbox's Chowdhury said.