FPIs return to Indian stock market after 36-day selling streak; is the trend sustainable?

Foreign portfolio investors (FPIs) made a notable return to Indian equities, ending a 36-session selling streak with net purchases exceeding ₹10,000 crore over two days. After turning net buyers on Monday, November 25, FIIs continued their buying trend on November 26, shows data from NSDL. 

This shift in sentiment coincided with two key developments: the landslide victory of the BJP-led NDA in Maharashtra and the ceasefire in the Middle East.

Another significant driver of FPI inflows was the MSCI (Morgan Stanley Capital Investment) index reshuffle, wherein stocks like Voltas, Oberoi Realty, BSE, Kalyan Jewellers, and Alkem Laboratories were added to the MSCI Global Standard Index, prompting passive inflows. MSCI also increased the adjustment factor of HDFC Bank to 1.00 from 0.75 as of the close of November 25, 2024, leading to an increase in its Foreign Inclusion Factor (FIF) to 0.74 from 0.56. 

Analysts estimate that around $2.5 billion (approximately ₹20,000 crore) of the inflows were tied directly to the MSCI rebalancing, highlighting a targeted rather than broad-based return of foreign capital.

FPI Selling Weighed on Indian Markets

The recent inflows come after two months of aggressive FPI selling, with cumulative net outflows surpassing ₹1.09 lakh crore across October and November. This selling spree was driven by several factors, including:

China's Stimulus: A large-scale economic stimulus package announced by China in late September prompted a shift in capital from Indian markets to Chinese assets.

Geopolitical Tensions: Rising conflicts in the Middle East and global uncertainty around the US presidential election added to the risk-off sentiment.

Domestic Concerns: India’s earnings season highlighted worries about a slowdown in consumption, further dampening foreign investors' appetite.

As a result, benchmark indices such as the Sensex and Nifty 50 experienced an around 11 per cent correction from their peaks hit in September, briefly entering bearish territory.

Is This the Start of a Sustained FPI Comeback?

While the recent inflows are a positive development, market experts caution against prematurely declaring a sustained FPI return, with several analysts advocating a cautious, wait-and-watch approach.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said with the China trade nearing its end and US valuations peaking, the FPI selling in India is likely to taper off. "Valuations of Indian large-cap stocks have moderated, and FPIs have resumed buying in IT stocks, which has lent resilience to the sector. Banking stocks have also remained resilient, thanks to strong domestic institutional buying,” he added.

Divam Sharma, Founder and Fund Manager, Green Portfolio PMS noted that geopolitical tensions, China’s economic stimulus, and US election-related uncertainty have driven FPI outflows. However, with Donald Trump now re-elected as US President, Sharma expects clarity in policy-making by early 2025.

“Trump has historically been favourable to India, and as his administration announces policies in the first quarter of CY25, we anticipate a resurgence of FPI confidence in emerging markets like India,” Sharma said.

FPI flows are closely linked to global risk sentiment and dollar liquidity, said Abhijit Bhave, Managing Director and CEO, Equirus Wealth.

“Recent outflows were largely driven by profit booking and a strong dollar. However, as the Federal Reserve nears the peak of its rate-hiking cycle and global liquidity improves, we expect FPI flows to stabilise. Currently, Indian equities have one of the lowest FPI ownership rates among emerging markets, at 17 per cent. India’s structural growth drivers and potential benefits from Trump’s trade policies could make it an attractive destination for foreign investors,” Bhave explained.

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