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Foreign investors pulled out ₹4,285 crore from Indian equities in the first three trading days of the month driven by apprehensions ahead of the third-quarter earnings season and high valuations of domestic stocks.

This came following an investment of ₹15,446 crore in the entire December, data with the depositories showed. The shift in sentiment comes amid global and domestic headwinds.

“FPIs are likely to continue selling as long as the dollar remains strong and the U.S. bond yields offer attractive returns. The dollar index at around 109 and the 10-year bond yield above 4.5% are significant deterrents to FPI flows,” V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

According to the data, Foreign Portfolio Investors (FPIs) offloaded shares worth ₹4,285 crore from Indian equities in the first three trading sessions of the month (January 1 to 3). The uncertainty among foreign investors is reflected in the ongoing trend of outflows.

“Investors have adopted a cautious stance ahead of the Q3FY25 earnings season, contributing to subdued market sentiment. Additionally, apprehensions surrounding the potential economic policies of U.S. President-elect Donald Trump and their implications for global markets have added to the cautious approach,” Himanshu Srivastava, Associate Director-Manage on Research at Morningstar Investment Research India, said.

A depreciating Rupee against the dollar has further weighed on FPI sentiment, as the currency risk makes Indian investments less attractive. Compounding this, the U.S. Federal Reserve’s indication of fewer rate cuts this year has failed to lift investor confidence. On the domestic front, FPIs selling is primarily due to rich valuations.

“FPIs selling is due to high valuations in the secondary market. In the primary market where the valuations are fair, FPIs have been sustained investors,” Mr. Vijayakumar said. The overall trend indicates a cautious approach by foreign investors, who scaled back investments in Indian equities significantly in 2024, with net inflows of just ₹427 crore.

This contrasts sharply with the extraordinary ₹1.71 lakh crore net inflows in 2023, driven by optimism over India’s strong economic fundamentals. In comparison, 2022 saw a net outflow of ₹1.21 lakh crore amid aggressive rate hikes by global central banks.

FPIs also invested ₹14,955 crore in the debt market in June. 
| Photo Credit: PTI

After two months of net outflow, foreign investors turned buyers in June, infusing ₹26,565 crore in Indian equities, driven by political stability and a sharp rebound in markets.

“Looking ahead, attention will gradually shift towards the Budget and Q1 FY25 earnings, which could determine the sustainability of FPI flows,” Vipul Bhowar, director, Listed Investments, Waterfield Advisors, said.

According to the data with the depositories, Foreign Portfolio Investors (FPIs) have made a net infusion of ₹26,565 crore in equities this month.

This came following a net outflow of ₹25,586 crore in May on poll jitters and more than ₹8,700 crore in 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, while they took out ₹25,743 crore in January. The net outflow now stood at ₹3,200 crore in the month, data with the depositories showed.

Geojit Financial Services Chief Investment Strategist V. K. Vijayakumar said political stability, despite the BJP not getting a majority on its own, and the sharp rebound in markets aided by steady domestic institutional investors (DIIs) buying and aggressive retail buying, has forced the FPIs to turn buyers in India.

“However, the FPI buying has been focussed on a few specific stocks rather than being widespread across the market or sectors. This is because Indian equities are still considered overvalued by FPIs,” Mr. Bhowar said.

They are favouring the financial, auto, capital goods, real estate, and select consumer sectors.

“With government stability assured, impressive GDP performance and forecasts, stable consumer price index, ample forex reserves and robust banking sector health, I anticipate a steady and substantial FPI inflow,” Kislay Upadhyay, smallcase Manager & Founder Fidelfolio, said.

Additionally, FPIs invested ₹14,955 crore in the debt market in June. With this, FPIs’ investment in the debt market reached ₹68,624 crore in 2024 so far. India’s inclusion in the JP Morgan Bond Index is positive.

In the long term, this will reduce the cost of borrowing for the government and the cost of capital for corporates. This is positive for the economy and therefore, for the equity and debt market.