FPIs turn cautious, pull out Rs 37K cr in FY25

While FPIs still maintain a significant weight, the emergence of retail investors in the stock market has played a crucial role in counterbalancing the impact of FPI outflows.
Image used for representational purpose.
Image used for representational purpose.

NEW DELHI: After a massive inflow of over Rs 2 lakh crore in the financial year 2023-24, foreign portfolio investors (FPIs) have turned cautious on the Indian equity market in FY25 owing to its premium valuation and a not-so-desired general election result.

The National Securities Depository Limited (NSDL) data shows FPIs have pulled out over Rs 37,000 crore in the first two-and-a-half months of FY25. During this period, domestic equity market benchmarks - BSE Sensex and NSE Nifty - have gained over 4% each.

As per Sunil Damania, Chief investment officer at MojoPMS, the valuation of Indian markets is high, with the trailing twelve-month (TTM) price-to-earnings (PE) ratio exceeding 25x and a market capitalisation-to-GDP ratio of 140%. “Such high valuations provide little incentive for FPIs to invest. There is also uncertainty surrounding the upcoming budget... As a result, FPIs are waiting to see until the budget is presented,” said Damamia.

Manoj Purohit, Partner and leader - of FS Tax, Tax and Regulatory Services, BDO India feels for global investors, the formation of a coalition government is a concern as they believe it could impact the pace of India’s growth story. Purohit said on the macro front, there are multiple triggers that have made FPIs shift their gears temporarily to other markets.

“High yielding rates of bonds in the US, deferment of US Fed interest rate cuts, better-than-expected performance of Chinese stocks coupled with the ongoing geopolitical conflicts in the Middle East has made FPIs to divert from the Indian market,” he added.

FPI holdings in Indian equities (in total m-cap) came down to 16.3% at the end of January 2024, which is a decadal low, from 16.6% as of November 2023. While FPIs still maintain a significant weight, the emergence of retail investors in the stock market has played a crucial role in counterbalancing the impact of FPI outflows.

Damania said FPIs are redirecting their investments towards China and Taiwan as these markets have seen major inflows due to their relatively low valuations and the prospects of economic reforms that could boost their economies.

Purohit believes that with the recent development and stability, the confidence of FPIs that India will continue the growth momentum has instilled back a positive framework and FPIs would return to India with numbers in green. FPIs made a strong comeback with a net inflow of Rs 11,730 crore in the week ending June. This contrasts sharply with the net outflow of Rs 14,794 crore recorded in the preceding week from June 3-7.

“After the roller coaster ride in the first week of June, stability has returned to the market as indicated by the sharp fall in India VIX from 27 on June 4 to 12.82 on June 14. This fall in India VIX indicates the return of stability and a likely consolidation phase in the market…The resilience of the market and eagerness of retail investors to buy every dip will force FPIs to reduce their selling which was sustained in May,” said V K Vijayakumar, chief investment strategist, Geojit Financial Services.

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