FPIs sell-off rises to ₹21,201 crore in India equities on domestic, global factors; When will inflows resume? #IndiaFinance

Foreign portfolio investors (FPIs) snapped their two-month buying streak in Indian equities and turned net sellers in August, driven by domestic and global factors. However, they were consistent buyers in June and July as stability returned to Indian markets. However, FPIs halted their buying streak with the onset of the new fiscal year 2024-25 (FY25).

FPIs sold ₹21,201 crore worth of Indian equities, and the net outflows stood at ₹9,653 crore as of August 16, taking into account debt, hybrid, debt-VRR, and equities, according to the National Securities Depository Ltd (NSDL) data. The total investment in debt markets stood at ₹9,112 crore so far in August.

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“A significant trend in FPI flows recently, which has become pronounced in August, is the sustained selling by FPIs through the exchange while continuing to invest through the ‘primary market & others’ category,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services

‘’This difference in FPI behaviour is due to the differences in valuations. The primary market issues are at comparatively lower valuations; in the secondary market, the valuations remain high. So FPIs are buying when securities are available at fair valuations and selling when the valuations get stretched in the secondary market,” added Dr. V K Vijayakumar.

What’s fuelling the sell-off from FPIs in Indian markets?

Analysts said the FPI outflows witnessed in August 2024 were primarily driven by global and domestic factors. Globally, concerns about the unwinding of the Yen carry trade, potential global recession, slowing economic growth, and ongoing geopolitical conflicts led to market volatility and risk aversion.

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‘’Domestically, after being net buyers in June and July, some FPIs might have chosen to book profits following a strong rally in previous quarters. Additionally, mixed quarterly earnings and relatively higher valuations have made Indian equities less attractive,” said Vipul Bhowar, Director Listed Investments, Waterfield Advisors.

Analysts also said that the Indian market is now the most expensive market in the world, and rich valuations are leading FPIs to withdraw money from Indian equities despite stable inflows into debt instruments.

‘’FPIs typically pursue valuations. Currently, India’s valuations are at a premium compared to historical premiums of other emerging markets. ‘’It’s worth noting that FPIs generally do not heavily invest in the Indian market for two consecutive years, as per historical patterns,” said Sunil Damania, Chief Investment Officer, MojoPMS.

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When will FPI inflows resume?

According to Geojit analysts, from August till the 17th, FPIs sold equity for ₹32,684 crore through the exchange even while investing ₹11,483 crore through the primary market and other categories.

‘’This trend is likely to continue since India is the most expensive market in the world now, and it is rational for FPIs to sell here and move the money to cheaper markets. This picture doesn’t change even if the market turns more bullish on fears regarding US recession receding,” said Dr. V K Vijayakumar.

According to Vipul Bhowar of Waterfield Advisors, despite the above factors, India’s strong economic performance, including GDP growth, reduced fiscal deficit, manageable current account deficit, and strong sector growth and industrial production, continues to attract many FPIs, indicating that FPI flows into India should persist.

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FPI activity in Indian markets

In July, FPIs invested ₹202432,365 crore in Indian equities, and the total investment in debt markets stood at ₹22,363 crore, over market resilience, which attracted greater inflows. FPIs snapped their two-month selling streak and turned net buyers in June, infusing ₹26,565 crore in Indian equities and ₹14,955 crore in the debt market.

The selling reversed after stability returned to the market as election jitters faded. In May 2024, FPIs offloaded ₹25,586 crore worth of Indian equities, and the debt inflows stood at ₹8,761 crore. Uncertainty over the outcome of the Lok Sabha elections 2024, high US bond yields, high Indian market valuations, and the outperformance of Chinese stocks weighed on sentiments.

FPIs offloaded ₹8,671 crore in Indian equities in April and ₹10,949 crore in debt markets over high US bond yields. However, they pumped ₹35,098 crore in Indian equities during March 2024 – the highest inflows recorded in the first three months of 2024. FPI outflow declined in February 2024 until they were net buyers by the end of the month despite high US bond yields.

The inflow into Indian equities stood at ₹1,539 crore in February 2024 and the debt market investment rose to ₹22,419 crore during the month on top of the ₹19,836 crore bought in January. The inclusion of government bonds to JPMorgan and Bloomberg debt indices had triggered foreign fund inflows into debt markets.

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FPIs turned massive sellers in January 2024, snapping their buying streak. Investments saw a sharp uptick in December 2023 after they reversed their three-month selling streak in November 2023. However, inflow intensified in December 2023 after the US Federal Reserve signalled the end of its tightening cycle and raised expectations of rate cuts. This led to a crash in US bond yields and triggered foreign fund inflows into emerging markets like India.

According to NSDL data, FPIs bought ₹1.71 lakh crore in Indian equities for the entire calendar year 2023. The total inflow, taking into account debt, hybrid, debt-VRR, and equities, stands at ₹2.37 lakh crore. FPIs’ net investment in the Indian debt market stood at ₹68,663 crore during 2023.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.