FPI inflows into Indian equities fall sharply in 2024; recovery expected in 2025

New Delhi, Dec 25 (PTI) After a robust 2023, foreign investors have significantly reduced their investments in Indian equities in 2024, with net inflows of over ₹5,000 crore as high domestic valuations, coupled with geopolitical uncertainties, prompt investors to take a more cautious stance.

Looking ahead to 2025, FPI flows into Indian equities could see a recovery, supported by a cyclical rebound in corporate earnings, especially in domestically focused sectors such as capital goods, manufacturing and infrastructure, said Vinit Bolinjkar, head of research at Ventura Securities. .

However, higher valuations and cheaper alternatives in other emerging markets, such as ASEAN and Latin America, could limit these inflows.

Moreover, lingering concerns about a prolonged global recession could have a negative impact on investor sentiment and appetite for risky assets, he added.

On the other hand, Feroze Azeez, deputy CEO at Anand Rathi Wealth Ltd, believes that geopolitical escalations, central bank rate cuts and possible US rate sanctions could act as tailwinds for FPI inflows into Indian markets.

As of now, foreign portfolio investors (FPIs) have made a net investment of more than ₹5,052 crore in the Indian stock markets and ₹1.12 lakh crore in the debt market (till December 24), according to data available with the depositories.

This follows the extraordinary ₹Net equity investments of Rs 1.71 lakh crore by 2023, driven by optimism over India’s resilient economic fundamentals. In contrast, 2022 saw the worst net outflow ₹1.21 lakh crore due to aggressive interest rate hikes by global central banks.

Prior to the outflow, FPIs have invested money in the last three years (2019, 2020 and 2021).

In 2024, FPI outflows were recorded during the months of January, April, May, October and November.

The drastic decline in FPI flows in 2024 is due to a combination of global and domestic factors.

The reduced inflows into Indian equities were mainly driven by higher valuations, which prompted investors to shift their investments to attractively valued Chinese stocks, said Himanshu Srivastava, Associate Director Manager Research at Morningstar Investment Research India.

This shift was further fueled by a series of stimulus measures introduced by China to boost economic growth, making its stocks increasingly attractive.

In addition, increased geopolitical tensions, especially the Israel-Iran conflict, increased risk aversion, pushing investors toward safer assets.

Caution ahead of the US presidential election and concerns about fewer US Fed rate cuts next year, despite this year’s 100 basis point cuts, have further dampened sentiment, he added.

On the domestic front, factors such as high valuations, weak corporate earnings for the September quarter, expectations of subdued results for December, rising inflation, slower GDP growth and a depreciating rupee have weighed on investor confidence, said Narender Singh, small case manager and founder at Growth invest, said.

Unlike equities, FPIs have shown a clear preference for investing in the Indian bond markets ₹1.12 lakh crore by 2024, an increase of ₹68,663 crore by 2023.

This trend has been significantly influenced by India’s inclusion in JP Morgan’s Government Bond Index, with expectations of further inclusion in other major global bond indices, together with expected interest rate cuts by the US Federal Reserve, leading to greater flow of foreign investors into the Indian bond markets. , said Morningstar’s Srivastava.

Besides inclusion in the index, other key factors include India’s improving fiscal position, where the deficit fell from 5.1 percent to 4.9 percent and is expected to fall to 4.5 percent next year, plus healthy foreign exchange reserves, it said Singh.

Moreover, FPI inflows into the debt market are expected to increase with Bloomberg including Indian government bonds in its emerging markets index by January 2025. Moreover, interest from various foreign pension funds in Indian government bonds is likely to drive more inflows into Indian government bonds. market, said Azeez of Anand Rathi Wealth.

Before 2023, FPIs had consistently withdrawn funds ₹15,910 crore by 2022, ₹10,359 crore in 2021, and a record ₹1.05 lakh crore in 2020.

On the equity front, the financial sector experienced the largest outflow in total ₹54,500 crore, followed by the oil and gas sector with ₹50,000 crore, and fast moving consumer goods (FMCG) with ₹20,000 crore.

FPIs started 2024 on a weak footing and retreated ₹25,700 crore in January, amid a spike in US bond yields and uncertainty surrounding the global and domestic interest rate environment.

However, this trend reversed in February and March when FPIs invested ₹36,600 crore, boosted by India’s strong economic growth, market resilience and easing of US bond yields.

The recovery was short-lived as FPIs turned net sellers in April, a trend that continued in May, driven by political uncertainty during the general elections.

Despite this, FPIs returned to equities in June and maintained their buying momentum until September, culminating in a net investment of ₹In September alone, interest stood at Rs 57,359 crore, supported by a rate cut by the US Federal Reserve.

However, October and November marked a sharp reversal, with FPIs pulling out en masse ₹1.16 lakh crore collectively. In October there was an unprecedented outflow ₹94,017 crore – the largest monthly drawdown ever – amid increased allocations to China, concerns over subdued corporate earnings and the high valuation of Indian equities.

Despite the volatility, FPIs showed signs of recovery in December, with net inflows far exceeding ₹20,071 crore so far, indicating renewed interest in Indian equities.