Foreign Portfolio Investors (FPIs) have pulled out a substantial Rs 28,200 crore from Indian equities in May 2024. This significant withdrawal is attributed to uncertainties surrounding the outcome of the general elections and the attractive valuations of Chinese markets. The withdrawal in May is considerably higher than the net pullout of Rs 8,700 crore in April, which was driven by concerns over amendments to India’s tax treaty with Mauritius and the sustained rise in US bond yields.
In the preceding months, FPIs showed varied investment patterns. In March, FPIs made a net investment of Rs 35,098 crore, while in February, they invested Rs 1,539 crore. However, the current electoral climate has prompted a shift in their investment strategy. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that political stability following the election could attract substantial inflows back into the Indian market.
Karthick Jonagadla, smallcase Manager and founder of Quantace Research, highlighted three factors that could bolster FPI inflows into India post-elections: a potential easing of interest rates by the US Federal Reserve, positive resolutions in global geopolitical tensions, and India’s increasing weight in the MSCI Emerging Markets Index, projected to exceed 20% by mid-2024. These factors could play a pivotal role in reversing the current outflow trend.
According to depository data, FPIs experienced a net outflow of Rs 28,242 crore in equities as of May 17, 2024. There are two main reasons for this sell-off. Firstly, the uncertainty surrounding the general elections has made FPIs cautious, prompting them to secure the profits made last year. Secondly, high market valuations have led FPIs to seek better opportunities elsewhere. Sunil Damania, Chief Investment Officer at MojoPMS, emphasized that FPIs generally prefer stability and are inclined to lock in profits during uncertain times.
Anirudh Naha, CIO-Alternatives at PGIM India Asset Management, pointed out that FPIs are reallocating funds to China and Hong Kong, which offer more attractive (cheaper) valuations compared to Indian stocks. Vijayakumar added that the primary trigger for FPI selling has been the outperformance of Hong Kong’s Hang Seng Index, which surged by 19.33% in the last month, prompting investors to move their funds from the relatively expensive Indian market to the more affordable Hong Kong market.
The ongoing geopolitical crisis in the Middle East, discomfort with relative valuations, and the strength of US bond yields have also contributed to the FPI withdrawal, according to Vipul Bhowar, Director of Listed Investments at Waterfield Advisors. Despite these outflows, FPIs invested Rs 178 crore in the Indian debt market during the same period.
Economic challenges such as recessionary pressures, inflationary concerns, and geopolitical tensions have added to market volatility, making investors more cautious. Bharat Dhawan, Managing Partner at Mazars in India, noted that these factors have significantly influenced investor behavior.
Prior to the outflows in May, foreign investors had been showing a positive trend. In March, they invested Rs 13,602 crore, while in February and January, they invested Rs 22,419 crore and Rs 19,836 crore, respectively. This influx was driven by the anticipated inclusion of Indian government bonds in the JP Morgan Index. In September of the previous year, JP Morgan Chase & Co announced the addition of Indian government bonds to its benchmark emerging market index starting June 2024, a move expected to attract USD 20-40 billion over the following 18 to 24 months.
Despite the recent outflows, FPIs have invested Rs 45,000 crore in the debt market in 2024. This dual investment pattern underscores the complexity of FPI behavior in response to both domestic and global economic conditions. Moving forward, the resolution of electoral uncertainties and global geopolitical tensions will be critical in determining the direction of FPI flows into Indian equities.
