FPIs take out ₹25,586 crore from equities in May on poll jitters, attractive valuations in China

Whenever the U.S. 10-year bond yields rose above 4.5%, FPIs sold in emerging markets like India and moved money to bonds. 
| Photo Credit: S.R. Raghunathan

Foreign investors pulled out a massive ₹25,586 crore from Indian equities in May due to uncertainty surrounding the outcome of general election and outperformance of Chinese markets.

This was way higher than a net outflow of over ₹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, data with the depositories showed.

Going ahead, election results, which will be out on June 4, could determine FPIs flows into Indian equities in the near future.

In the medium term, U.S. interest rates will exert more influence on FPI flows, Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said.

According to the data, Foreign Portfolio Investors (FPIs) made a net withdrawal of ₹25,586 crore from equities in May.

The relatively high valuations and weak earnings, particularly in the financial and IT sectors where FPIs have a high allocation, along with political uncertainties such as ambiguity around the outcome of elections, global risk-off sentiment, and the appeal of Chinese markets, have led to FPI selling, Vipul Bhowar, Director of Listed Investments at Waterfield Advisors, said.

“The main trigger for the FPI selling has been the outperformance of the Chinese stocks. The Hang Seng index boomed 8% in the first half of May, triggering selling in India and buying in Chinese stocks,” Mr. Vijayakumar said.

Another reason was the spike in U.S. bond yields. Whenever the U.S. 10-year bond yields rose above 4.5%, FPIs sold in emerging markets like India and moved money to bonds. These two factors triggered the selling in equity in India, he added.

Further, robust GDP growth, manageable inflation and political stability can create a positive outlook for the Indian economy, marking a turnaround from their net selling in May.

GDP growth numbers released on Friday painted a very optimistic picture. Q4FY24 GDP growth came in at 7.8% surpassing the 6.7% expectation, while the full-year FY24 growth stood at 8.2%.

Additionally, the record dividend of ₹2.1 lakh crore from the RBI has provided further fiscal room for the government to continue focus on infra spending.

“These factors suggest that monthly FPI inflows could exceed a sustained ₹30,000 crore (in this month) if the current government remains in power,” Kislay Upadhyay, smallcase manager & Founder of FidelFolio, said.

Shailesh Saraf, smallcase Manager and CEO of Valuestocks, said: “We are extremely bullish on the Indian markets as we are expecting the ruling party to come to power once again. Also if we look at the corporate profits for March 2024, there has been a 10% Year-on-Year increase…which bodes well for the markets”.

On the other hand, FPIs invested ₹8,761 crore in debt and ₹4,283 crore through debt-VRR (Voluntary Retention Route). Before this, foreign investors put in ₹13,602 crore in March, ₹22,419 crore in February, ₹19,836 crore in January.

This inflow was driven by the upcoming inclusion of Indian government bonds in the JP Morgan Index.

Market experts believe that long-term outlook for FPI flows into Indian debt is positive due to India’s inclusion in global bond indices.

However, near-term flows are being impacted by global macroeconomic uncertainty and volatility. Overall, FPIs withdrew a net amount of ₹23,364 crore from equities in 2024 so far. They however invested ₹53,669 crore in debt market.