Sharp decline in FPI flows into Indian equities in 2024; Expected rebound in 2025

After a strong 2023, foreign investors pulled back their investment in Indian equities significantly in 2024, with net inflows of over Rs 5,000 crore, as elevated domestic valuations, geopolitical uncertainties prompted investors to take a more cautious stance. Looking ahead to 2025, Indian equities may see a recovery in FPI inflows, supported by a cyclical uptick in corporate earnings, particularly in domestically-oriented sectors such as capital goods, manufacturing and infrastructure, said Vinit Bolingkar, head of research at Ventura Securities. .

However, higher valuations and cheaper alternatives in other emerging markets such as ASEAN and Latin America may impede this flow.

Additionally, lingering concerns about a prolonged global slowdown could weigh on investor sentiment and appetite for risk assets, he added.

On the other hand, Feroze Aziz, Deputy CEO of Anand Rathi Wealth Ltd believes that geopolitical upheaval, central bank interest rate cuts and possible US tariff restrictions could act as tailwinds for FPI inflows into Indian markets.

As per data available with depositories, so far, foreign portfolio investors (FPIs) have invested Rs. 5,052 crore and in the debt market (as on December 24) Rs. 1.12 lakh crore net investment has been made.

In this 2023 equity in extraordinary Rs. 1.71 lakh crore followed by net investment, driven by optimism surrounding India’s resilient economic fundamentals. In contrast, aggressive rate hikes by global central banks in 2022 could lead to Rs. 1.21 lakh crore was the worst net inflow seen.

Before the outflow, FPIs had 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 sharp decline in FPIs inflows in 2024 is due to a combination of global and domestic factors.

Himanshu Srivastav, associate director of manager research at Morningstar Investment Research India, said the declining flow in Indian equities was mainly driven by higher valuations, which encouraged investors to redirect their investments to attractively valued Chinese equities.

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

In addition, heightened geopolitical tensions, particularly the Israel-Iran conflict, have pushed investors away from risk aversion to safer assets.

Sentiment fell further due to caution ahead of the US presidential election and concerns that the US Fed will cut rates less than expected despite a 100 bps cut this year, he added.

On the domestic front, factors such as higher valuations, weak corporate earnings for the September quarter, expectations of lower December results, rising inflation, slower GDP growth and a depreciating rupee have weighed on investor confidence, Narendra Singh, smallcase manager and founder Growth Investing, said.

Unlike equities, FPIs have shown a marked preference for the Indian debt market, which in 2024 is expected to reach Rs. 1.12 lakh crore, which in 2023 will be Rs. 68,663 crore is over.

The trend has been significantly influenced by India’s inclusion in JP Morgan’s government bond index, an expected interest rate cut by the US Federal Reserve along with expectations of further inclusion in other major global bond indices has increased foreign investor inflows into Indian bond markets. , said Morningstar’s Srivastava.

Besides the index inclusion, other key drivers include India’s improving fiscal position where the deficit has declined to 4.9 percent from 5.1 percent and is expected to decline to 4.5 percent next year, Singh said.

Further, FPI inflows into the debt market are expected to increase as Bloomberg is including Indian government bonds in its emerging market index by January 2025. Additionally, interest from various foreign pension funds in Indian government bonds is likely to create further inflows into Indian debt. market, said Aziz of Anand Rathi Wealth.

Prior to 2023, FPIs have consistently drawn funds, with record withdrawals of Rs 15,910 crore in 2022, Rs 10,359 crore in 2021 and Rs 1.05 lakh crore in 2020.

On the equity front, the financial services sector experienced the largest outflow, totaling Rs. 54,500 crore, followed by Rs. 50,000 crore with oil and gas sector and Rs. 20,000 crore including fast-moving consumer goods (FMCG).

FPIs started 2024 on a weak note amid rising US bond yields and uncertainty around the global and domestic interest rate environment, falling in January to Rs. 25,700 crore withdrawn.

However, the trend reversed in February and March, as FPIs, encouraged by India’s strong economic growth, market resilience and easing in US bond yields, rose to Rs. 36,600 crore had been invested.

The recovery was short-lived, as FPIs became net sellers in April, which continued into May due to political uncertainty during the general elections.

Despite this, FPIs returned to equities in June and maintained their buying pace till September, buoyed by the rate cut from the US Federal Reserve, in September itself to Rs. 57,359 crore resulting in a net investment.

In October and November, however, FPIAs collectively spent Rs. 1.16 lakh crore marked a sharp reversal with massive withdrawals. Amid increased allocations to China, concerns over muted corporate earnings and higher valuations of Indian equities in October, Rs. 94,017 crore witnessed an unprecedented outflow – the largest monthly withdrawal on record.

Despite the volatility, FPIs have shown signs of revival in December, with year-to-date net inflows of Rs. 20,071 crore, indicating renewed interest in Indian equities.