Foreign portfolio investors (FPIs) began August on a sour note, snapping their two-month buying streak in Indian equities over global cues. FPIs were consistent buyers for June and July as stability had returned to Indian markets. However, FPIs had halted their buying streak with the onset of the new fiscal 2024-25 (FY25). Volatility over Lok Sabha elections, outperformance in Chinese markets, and other global cues had earlier weighed on the sentiments of foreign investors.
FPIs sold ₹1,027 crore worth of Indian equities, and the net investment stood at ₹2,448 crore as of August 3, taking into account debt, hybrid, debt-VRR, and equities, according to the National Securities Depository Ltd (NSDL) data. The total investment in debt markets stood at ₹3,641 crore so far in August.
"In July 2024, FPIs injected ₹37,957 crore into Indian equities, continuing their recovery from previous withdrawals in April and May attributed to prevailing uncertainties. This resurgence can be attributed to a stable political environment, ongoing economic reforms, and appealing market valuations within India," said Vipul Bhowar, Director of Listed Investments, Waterfield Advisors.
Market analysts noted that FPI investment has been inconsistent recently, alternating between buying and selling. ‘’This sharply contrasts with the consistent buying by domestic institutional investors (DIIs)…For CY 2024 total FPI investment in equity stands at ₹35,565 crore,'' said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
According to recent US jobs data, 114,000 US jobs were added in July, well below estimates, and the unemployment rate unexpectedly climbed for a fourth month to 4.3 per cent, renewing concerns that the economy is slowing. This follows Thursday's data showing that US manufacturing activity shrank by the most in July in eight months.
Geojit's Dr V K Vijayakumar said some developments could impact FPI flows in the near term. The sharp drop in job creation in the US and rising unemployment indicate the possibility of a recession in the world's largest economy, which the market has ruled out so far.
‘’Concerns surrounding a looming recession or stagnant job growth in the US could prompt FPIs to adopt a more cautious approach, potentially resulting in investment flow volatility,'' said Vipul Bhowar of Waterfield.
Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services, BDO India, noted that though US inflation seems under control at the moment, another pressing factor is the job market data, which has not improved much compared to last quarter. The impact could be seen in India, where the rupee slipped to a record low.
FPIs are taking a cautious approach, keeping in mind the concerns raised by the US Federal Reserve and booming geopolitical tensions in the Middle East, which indicate early signs of recession. There are several aspects worth noting before one concludes that the US economy has entered a recession phase.
‘’The rising unemployment rate, weakening manufacturing index and lowering of treasury yields cumulatively gives an alarming signal for the recession. However, the government was optimistic in its policy statement earlier this week about easing inflation and stagnating the job market. One needs to wait and watch the impact of the unchanged Fed rate in the coming months on the inflation and the unemployment numbers,'' said Manoj Purohit of BDO India.
According to Manoj Purohit of BDO India, the Federal Reserve's announcement on July 31 that it will keep the key rate unchanged will provide partial relief, as the window to make a cut in the coming months will remain open.
‘’Weaker-than-expected employment data and a slowing economy have ensured that the US Fed will cut rates in September. The more important question here is the extent of the cut. Currently, there is strong commentary building for maybe a 50 bps cut in interest rates,'' said Vaibhav Porwal, Co-founder of Dezerv.
Market experts have priced in a rate cut by the US central bank. Vipul Bhowar of Waterfield Advisors noted that a potential rate reduction by the US Federal Reserve may incentivise FPIs to amplify their investments in India as they seek higher returns.
‘’While the US Fed provided mixed commentary regarding their rate cut path, the recent weak job data and the benign inflationary environment will definitely strengthen the case for a rate cut in September. The key thing to watch out for is the path going ahead regarding whether there will be more rate cuts during the calendar year or if they get pushed out to next year,'' said Milind Muchhala, Executive Director, Julius Baer India.
Geojit's Dr V K Vijayakumar said the US 10-year bond yield had fallen sharply to 3.79 per cent as the possibility of a September rate cut by the US Fed is very high. ‘’Even though this is positive for FPI inflows into emerging markets like India, FPIs may think of pulling more money out of India since India is the most expensive emerging market now,'' he said.
Market analysts reiterated that the FPIs have been involved in mixed activity recently, with bouts of buying and selling, a trend that will likely continue for some time. ‘’Their activity will remain influenced by various factors, including the performance of the global equity markets, the movement of the dollar index, incremental geopolitical events, and opportunities in the Indian markets considering slightly elevated valuation levels,'' said Muchhala of Julius Baer India.
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BDO India's Manoj Purohit said that the spike in the capital gains tax and the removal of the indexation benefit were a few factors that resulted in a higher tax burden for investors. Another factor was a hike in the STT rate for FnO trades, which will impact liquidity and also make hedging costlier.
Some positive changes for foreign investors were the abolition of the angel tax and the reduction of the foreign corporate tax rate from 40 to 35 per cent.
‘’With much-needed clarification on the taxability of ETFs, retail funds in IFSCs and finance companies, the government has shown its readiness to absorb the large chunk of forex in the market to make it at par with the other global financial hubs,'' said Purohit.
‘’Despite the macro factors and the Budget 2024 proposals on capital gains tax, which beefed up the capital market participants, the current week has shown a significant rise in the inflows by foreign investors in the equity space in India. We may witness the impact of this wave to continue in the next few trading cycles as well,'' said Manoj Purohit on BDO India.
‘’The recent consultation paper floated by SEBI on monitoring investors from Land-Bordering Countries will also alert investors from China and Hong Kong, who primarily invest as FPIs via Singapore and Mauritius vehicle structures,'' he added.
Additionally, Vipul Bhowar of Waterfield Advisors said, ‘’'FPIs may opt to prioritise sectors that benefit from domestic reforms and growth, such as technology and infrastructure while approaching sectors vulnerable to global economic downturns with prudence.''
Market analysts believe the investor fraternity looks at India as a preferred jurisdiction compared to other markets. They also highlight that FPIs in India will continue to grow under a stable government regime, a conducive environment backed by inflation control, fiscal prudence, and a far-sighted vision for India to become a global hub for capital markets.
‘’Since India is one of the best-performing markets in the world, the FIIs cannot afford to sell continuously in India even though valuations are getting stretched,'' said Geojit's Dr V K Vijayakumar. ‘’The developments in the US economy and markets in the coming days will set the trend for FPI in August,'' he added.
Milind Muchhala of Julius Baer India believes that India remains an attractive investment destination amid a healthy economic and earnings growth momentum, and FPIs cannot afford to ignore the markets for too long.
‘’A global risk-on environment triggered by increasing expectations of rate cuts could lead to increasing flows to EM equities, with India expected to emerge as one of the bigger beneficiaries of the flows,'' said Muchhala.
In July, FPIs invested ₹32,365 crore in Indian equities, and the total investment in debt markets stood at ₹22,363 crore on the back of strong market resilience, which attracted greater inflows. FPIs snapped their two-month selling streak and turned net buyers in June, infusing ₹26,565 crore in Indian equities and ₹14,955 crore in the debt market. The selling reversed after stability returned to the market as election jitters faded.
In May 2024, FPIs offloaded ₹25,586 crore worth of Indian equities, and the debt inflows stood at ₹8,761 crore. Uncertainty over the outcome of the Lok Sabha elections 2024, high US bond yields, high Indian market valuations, and the outperformance of Chinese stocks weighed on sentiments.
FPIs offloaded ₹8,671 crore in Indian equities in April and ₹10,949 crore in debt markets over high US bond yields. However, they pumped ₹35,098 crore in Indian equities during March 2024 - the highest inflows recorded in the first three months of 2024. FPI outflow declined in February 2024 until they were net buyers by the end of the month despite high US bond yields.
The inflow into Indian equities stood at ₹1,539 crore in February 2024 and the debt market investment rose to ₹22,419 crore during the month on top of the ₹19,836 crore bought in January. The inclusion of government bonds to JPMorgan and Bloomberg debt indices had triggered foreign fund inflows into debt markets.
FPIs turned massive sellers in January 2024, snapping their buying streak. Investments saw a sharp uptick in December 2023 after they reversed their three-month selling streak in November 2023. However, inflow intensified in December 2023 after the US Federal Reserve signalled the end of its tightening cycle and raised expectations of rate cuts. This led to a crash in US bond yields and triggered foreign fund inflows into emerging markets like India.
According to NSDL data, FPIs bought ₹1.71 lakh crore in Indian equities for the entire calendar year 2023, and the total inflow, taking into account debt, hybrid, debt-VRR, and equities, stands at ₹2.37 lakh crore. FPIs' net investment in the Indian debt market stood at ₹68,663 crore during 2023.
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