Foreign investors have pulled out a massive ₹22,000 crore from Indian equities so far this month, due to uncertainty surrounding the outcome of the Lok Sabha elections and outperformance of Chinese markets.
This came following a net outflow of over ₹8,700 crore in the entire April on concerns over a tweak in India’s tax treaty with Mauritius and a sustained rise in U.S. bond yields. Before that, FPIs made a net investment of ₹35,098 crore in March and ₹1,539 crore in February.
Going forward, as clarity emerges on the election front, Foreign Portfolio Investors (FPIs) are likely to buy in India, since they cannot afford to miss the post-election results rally.
Actually, the rally may begin even before the election results, V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said.
According to data with depositories, Foreign Portfolio Investors (FPIs) witnessed a net outflow of ₹22,047 crore from equities this month (till May 24).
“This heavy selling was triggered by the massive outperformance of Chinese stocks. The Hang Seng index, dominated by Chinese stocks (FPIs invest through the Hong Kong market since there are restrictions on investing through the Shanghai market) surged 7.66% during the last month,” Mr. Vijayakumar, said.
The election-related jitters, too, might have influenced FPI selling.
With the on-going general election in the country and the uncertainty surrounding its outcome, foreign investors at this point are wary to enter the Indian equity markets before the announcement of election results, Himanshu Srivastava, Associate Director — Manager Research, Morningstar Investment Research India, said.
“In recent times, the U.S. Fed has indicated that it would not go ahead with rate cuts until inflation cools and consistently moves towards the target range. This has raised scepticism over the possibility of an early rate cut.
“It led to the appreciation in the U.S. Dollar leading to a surge in U.S. Treasury yields. This doesn’t augur well for the emerging markets like India, as under such scenario investments also tend to shift from riskier assets like emerging market equities to more safer asset classes such as U.S. Dollar and U.S. Treasuries,” he added.
On the other hand, FPIs invested ₹2,009 crore in the debt market during the period under review.
Before this outflow, foreign investors put in ₹13,602 crore in March, ₹22,419 crore in February, ₹19,836 crore in January. This inflow was driven by the upcoming inclusion of Indian government bonds in the JP Morgan Index.
“The long-term outlook for FPI flows into Indian debt is positive due to India’s inclusion in global bond indices. However, near-term flows are being impacted by global macroeconomic uncertainty and volatility. The trend will reverse once the interest rate outlook becomes clearer,” Vipul Bhowar, Director, Listed Investments at Waterfield Advisors, said.
JP Morgan Chase & Co. in September last year announced it will add Indian government bonds to its benchmark emerging market index from June 2024. This landmark inclusion is anticipated to benefit India by attracting around $20-40 billion in the subsequent 18 to 24 months.
Overall, FPIs have withdrawn a net amount of ₹19,824 crore in equities in 2024 so far, however, invested ₹46,917 crore in debt market.