Funds from US and Japan make bigger plays on D-Street

Institutional investors from the US and Japan are increasing their exposure to Indian equities post Modi's election victory. US funds hold a record 42.2% share while Japanese funds are at 2.9%. Interest rate differences between countries are impacting investment decisions.

Institutional investors from US and Japan are taking higher exposures to following the general election outcome giving the Modi-led NDA government a third term, which is expected to ensure continuity in policies.

The combined weight of US and Japan-based funds in the total equity exposure of in India reached a record high of 45.1% at the end of June 2024 compared with the five-year average of 41.4%, according to NSDL data. US-domiciled funds accounted for a record 42.2% share while held 2.9%, nearing a four-year high.

While the funds from these two countries are focusing on the same market, their regional interest rate situations are different, which presents an interesting contrast.

For instance, interest rates in the US are widely believed to have peaked with an expectation of two interest rate cuts this year. On the other hand, the Bank of Japan increased the interest rate in March - the first time in 17 years.

This suggests that the prospects of in Asia's third-largest economy are gaining prominence for investors over the interest rate arbitrage between developed nations and India, which is gradually losing its appeal as an investment rationale.

The of US-based funds reached a record ₹30.2 lakh crore ($361 billion), equivalent to 70% of the total equity value of India's domestic mutual funds. For Japanese funds, the assets under management (AUM) rose by 70% to ₹2.1 lakh crore ($25 billion) in June, one of the highest jumps among major countries. Overall, FPI equity AUM grew by 39% year-on-year to ₹71.4 lakh crore ($856 billion), accounting for nearly 17% of India's total market capitalisation.

Among the largest Japanese investors are , which hold stakes in key Indian companies such as Reliance Industries, , Larsen & Toubro, and .

Japanese government pension funds are invested in 162 Indian companies, comprising 1.8% of the total foreign equity holdings of $378 billion.

Source: Stocks-Markets-Economic Times