In the opening week of April, foreign investors have shown a marked caution in their approach to the Indian stock market, retracting ₹325 crore from Indian equities. This pullback reflects concerns over the country’s relatively high equity valuations and the approaching general elections. The net withdrawal starkly contrasts with the robust inflow of ₹35,000 crore in March and further ₹1,539 crore in February, according to the figures released by the depositories.
Analysts are closely monitoring the US economic indicators as a key factor influencing foreign portfolio investment (FPI) trends. Notably, the US 10-year yield recently surged to 4.4%, an uptick that is likely to affect near-term investment flows from FPIs into India. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, however, remains optimistic. He anticipates the selling activity of FPIs to remain in check, crediting the resilience of the bullish Indian stock market that has been setting new records consistently.
Alternative perspectives also indicate a possible turnaround in the FPI stance post-elections. Krishna Appala, a smallcase Manager and Senior Research Analyst at Capitalmind, suggests that FPIs might gear up for a return following the general elections or in the wake of early signs pointing towards a rate reduction by the US Federal Reserve.
Despite the withdrawal from equities, FPIs have not retreated entirely from the Indian financial markets. During the same period, these investors have channelled a net sum of ₹1,215 crore into the debt sector. The compelling interest rates globally play a significant role in this strategic shift. With the Indian government securities (G-Sec) 10-year yield hovering around 7.1% and the US counterpart at 4.3%, FPIs are finding themselves enticed by the higher yields offered by bond instruments in both countries.
Moreover, the Indian debt market has been witnessing a sustained inflow of FPI funds over the past few months. This investment spree stems from the impending inclusion of Indian government bonds in the JP Morgan Index slated for June 2024. With an eye on this horizon, FPIs injected ₹22,419 crore in February, backed by substantial investments of ₹19,836 crore and ₹18,302 crore in January.
The anticipated addition of Indian government bonds to the JP Morgan benchmark emerging market index is a momentous development for India’s financial landscape. This initiative is projected to act as a significant draw for international capital, potentially bringing in $20-40 billion within the following 18 to 24 months post-inclusion.
Expected consequences of this infusion include augmented foreign investor accessibility to Indian bonds, an accompanying fortification of the rupee, and a broader strengthening of the Indian economy. Sector-wise, FPIs have shown a pattern of selling in the fast-moving consumer goods (FMCG) industry, while being bullish on the telecommunications and realty sectors. In the broader scheme of things, the total FPI inflow for the current year has surpassed ₹10,500 crore in equities and an impressive over ₹57,000 crore in the debt markets.
The ebb and flow of foreign investment reflect a complex interplay of local and global economic signals, political climates, and market performances. As the Indian stock market continues to surge and global interest rates evolve, the strategies of foreign investors remain a critical point of interest for market analysts and participants alike.
