Foreign Portfolio Investors (FPIs) have withdrawn an unprecedented ₹85,790 crore from Indian equities in October 2024. This marks the worst-ever monthly outflow, surpassing March 2020’s withdrawal of ₹61,973 crore amid the pandemic.
The FPI exit from India follows several factors, including China’s economic stimulus measures, lower valuations in the Chinese stock market, and the high valuations in India. October’s outflow comes after FPIs invested ₹57,724 crore in September, signaling a quick shift in investment preferences.
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Historical FPI Outflow Trends in India
The Indian market has seen FPI inflow and outflow cycles before, but October 2024 has broken records. In April and May 2024, FPIs withdrew ₹34,252 crore, which they then reinvested over the summer months. Despite recent volatility, FPIs have mostly been net buyers in 2024. Only January, April, and May saw net FPI outflows before October.
Sectoral Impact of FPI Outflows
FPI selling has affected multiple sectors, especially tech, financials, and energy. These sectors typically attract high FPI activity and are sensitive to global fund flows. Consumer goods and pharmaceuticals, driven more by domestic demand, have been less impacted. Nifty has fallen around 8% from its peak, reflecting weakened market sentiment.
Market Impact of FPI Outflows
The continued FPI outflows have weighed heavily on the Indian stock market. The NSE Nifty index, a key benchmark, has fallen by about 8% from its peak, showing the immediate impact of foreign selling pressure. Domestic investors, though significant, have not fully offset this decline, contributing to volatility in Indian equities. The decline in market indices indicates how sensitive Indian equities are to FPI flows, underlining the importance of foreign investment for market stability.
Additionally, FPIs are monitoring domestic indicators such as inflation, corporate earnings, and festival season demand. High inflation levels and mixed earnings reports have raised questions about the sustainability of recent stock valuations. A strong domestic demand season could help offset some of the negative impact, but the longer-term outlook remains uncertain.
Key Factors Driving FPI Outflows
One of the primary reasons for the massive outflow is the relatively high valuation of Indian stocks. Indian equities have been trading at elevated levels, making them expensive compared to other emerging markets. In contrast, China has recently rolled out economic stimulus measures and is offering stocks at much lower valuations. This has made Chinese markets more attractive to FPIs, who see potential for higher returns there.
Geopolitical tensions are also impacting investor confidence in India. Conflicts such as Israel-Iran and Russia-Ukraine create instability, making emerging markets appear riskier to global investors. With a cautious outlook on global volatility, many FPIs are shifting capital to what they consider “safer” markets, moving funds away from regions impacted by such geopolitical uncertainty.
India’s Economic Strengths and Long-Term Potential
Despite current FPI outflows, India’s strong economic fundamentals remain appealing. The Indian economy is expected to grow steadily, with sectors like digital technology, manufacturing, and services showing resilience. Initiatives like “Atmanirbhar Bharat” and “Make in India” are designed to strengthen local industries and attract global investments. These long-term growth strategies may bring FPIs back when valuations stabilize.
Expert Opinions on FPI Trends
According to V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, China’s stimulus measures and India’s high valuations have prompted FPIs to sell. Akhil Puri from Forvis Mazars India noted that heightened global uncertainties are pushing investors to safer markets. Experts suggest that global and domestic indicators will play a key role in FPI flows over the coming months.
Domestic Investment Resilience and Retail Support
Domestic retail investors are helping to offset FPI outflows. Systematic Investment Plans (SIPs) and increased retail participation have added stability to Indian markets, even amid FPI selling. While retail capital isn’t large enough to fully replace FPI funds, it provides a buffer that may ease volatility.
Future Outlook for FPI Activity in India
Looking forward, experts suggest that India’s long-term fundamentals could attract FPIs once global factors stabilize. Factors such as corporate earnings, festive season demand, and inflation trends will be critical for domestic markets. If India’s valuations become more favorable, it’s likely that FPIs will return.
Recommendations for Investors During High Outflow Periods
For retail investors, staying focused on India’s economic growth drivers is essential. Diversifying investments and avoiding panic selling can help manage risk during periods of FPI volatility. Experts recommend a long-term perspective, especially in sectors with solid domestic growth potential.
Broader Economic Influences
Economic conditions in the US are adding to the pressures on emerging markets like India. Rising US bond yields and tempered expectations for Federal Reserve rate cuts are drawing some FPIs back to US assets. Higher yields in the US present a safer investment option with relatively lower risk, further attracting funds away from Indian markets. Additionally, with the upcoming US elections, global markets are on edge, and this uncertainty may continue to weigh on FPI flows into India.
On top of this, FPIs’ stance on India’s debt market has also turned cautious. While they withdrew ₹5,008 crore from the debt general limit in October, they invested ₹410 crore through the Voluntary Retention Route (VRR), a more stable route. This cautious approach in debt reflects their broader sentiment of risk aversion, indicating that FPIs are closely watching debt market conditions as well.
Conclusion: Outlook for FPIs and the Indian Market
In summary, October’s record outflow of foreign investment from Indian equities is a signal of caution among global investors. High valuations in India, combined with more attractive opportunities elsewhere and ongoing global instability, have created an environment where FPIs are wary of long-term commitments. Moving forward, India’s appeal to FPIs will depend on economic resilience, balancing stock valuations, and ensuring domestic stability to navigate these volatile times.
India remains an attractive long-term market, but challenges around valuation and economic stability need attention to keep it competitive.
