US and Japanese funds make big plays on D-Street

Institutional investors from the US and Japan are taking high exposure to Indian equities following the general election results that gave the Modi-led NDA government a third term, which is expected to ensure continuity in policies.

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

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

For instance, interest rates in the US are believed to have peaked with two rate cuts expected this year. On the other hand, the Bank of Japan raised interest rates in March – the first time in 17 years.

This suggests that earnings growth prospects in Asia’s third-largest economy are gaining importance for investors due to interest rate arbitrage between developed nations and India, which is gradually losing its appeal as an investment rationale.

Equity AUM of US-based funds reached a record ₹30.2 lakh crore ($361 billion), accounting for 70% of the total equity value of India’s domestic mutual funds. For Japanese funds, assets under management (AUM) rose 70% to ₹2.1 lakh crore ($25 billion) in June, the biggest jump among major countries. Overall, FPI equity AUM grew 39% year-on-year to ₹71.4 lakh crore ($856 billion), accounting for about 17% of India’s total market capitalization.

The largest Japanese investors include the government pension fund, which holds stakes in major Indian companies such as Reliance Industries, Bharti Airtel, Larsen & Toubro and TCS.

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