Foreign Portfolio Investors (FPIs) have contributed significantly in the formative aspects to Indian equity market performances. After a brief slowdown, the FPIs have made a strong comeback with the transformation in global economic shifts and reformative policies. An important catalyst behind the resurgence in this respect is the supersized 50 bps cut by U.S. Federal Reserve. This has revitalized the Indian markets and also created a surge in the investment from FPIs, which helps sustain an optimistic period.
This report digs into what reasons could be prompting the increased interest of FPIs in India, what factors are fueling the inflows, and what opportunities this may hold for the following months.
Table of Contents
A Strong Comeback: FPIs in Indian Markets
In Indian markets, the FPI has resumed its buying spree of late after having witnessed a phase of moderation. According to the NSDL, FPIs had invested ₹57,359 crore in Indian equities till September 27, 2024. However, the total net investments, which include debt, hybrid instruments, and equities, stand at ₹91,702 crore. These numbers indicate nearly nine months’ high inflows for FPIs, undergirded by both domestic and global factors.
This rebound has been caused due to a wait-and-watch period by FPIs following the earlier uncertainty of elections and global economic issues. However, political stability and improving macroeconomic conditions in India have given a boost to the confidence of investors and have witnessed capital inflows in large numbers.
Why FPI is Attracted towards Indian Markets
A few factors exist to attract FPIs towards Indian equities with both aspects on domestic and global dimensions.
Global Economic Trends: The largest influencer of FPI behavior is US Federal Reserve’s monetary policy. The last 50 bps interest rate cut taken by the Fed on September 18th, 2024 has marked a decisive turn in their monetary policy. This dovish turn is going to ease the liquidity condition and would invite capital flows into emerging markets like India. Lower rates in the U.S. are less attractive for dollar-denominated assets, hence will find more appeal in higher-yielding like India, for investors.
Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services says, “The acts of the U.S. Fed have paved the way for sustained inflows of FPIs into the country. This foreign money injection at ₹1,00,245 crore by FPIs to the kitty for the year 2024 has stabilized the Indian Rupee and boosted sentiment.”.
Interest Rate Differential: Interest rate differential with the U.S. is important to attract FPI investments to India. According to Manoj Purohit, Partner and Leader of FS Tax, Tax, and Regulatory Services at BDO India, the recent Fed rate cut enhanced liquidity in Indian markets. The decline in the value of the Indian Rupee and the volatility of currency fluctuations make the appeal of Indian assets to the foreign investor all the more firm. These look for a bargain in the high exchange rates available.
Record Highs in Indian Markets: During the week, Indian equity markets had touched record highs with Sensex breaking out at new all-time highs. FPI inflows have been largely responsible for this upsurge. The great FPI sentiment further added to comfort for investing in Indian markets which has created a self-reinforcing cycle of investments and growth. FPI inflows continued unabated in June and July in the aftermath of climactic moments of election jitters and September follows the same trend.
Supportive Domestic Policy: The proactive Indian government offers policies to make the country an investment destination of choice. The SEBI dedicated FPI Outreach Cell is an important initiative in that direction, facilitating direct engagement with foreign investors in all matters relating to and technical support during the registration process towards pre-application documentation, compliance procedures, and resolution of operational challenges.
Creating this cell is part of the overall efforts by SEBI towards more transparency and lower regulatory friction for making India a much more liberalized and accessible market for foreign investors. According to Purohit, these efforts would further be supplemented at the SEBI Board Meeting scheduled for September 30, 2024. Any announcements made at this meeting would strengthen the perception about India as an inviting and easy-to-navigate platform for offshore investors.
Break up of FPI Investment: Equity and Debt FPIs have retained capital infusion at a level sufficiently high both in equities as well as debt instruments during September. In equities, FPIs infused ₹57,359 crore. The debt instrument witnessed an increase of ₹8,543 crore from FPIs. The sharpness in figures in September stems primarily because YTD it accounted for the largest inflows of FPIs in equities, which speaks volumes about the degree of trust that investors place on India’s equity market.
This mainly represents the investment happening through exchanges, while equity inflows of ₹46,480 crore came in through exchange-based transactions. In that sense, this also indicates the appeal of Indian equities, which have reported buoyant returns over recent months. True, selling does happen at times in the cash market; however, the overall mix has been one of steady buying, especially in the primary market.
The Broader Perspective: Global Market Trends and FPI Flows
Till recently, however, Indian markets have been attracting inflows from FPIs. Analysts point out that in the latest scenario, though, there is a redirectional interest in other Asian markets. Among them, Hong Kong has emerged as a star performer. In September alone, the Hang Seng index gained 14%. Monetary and fiscal stimulus measures by China are behind this rally-the central bank and the government cutting interest rates and the budget together to revive the faltering economy in China and increasing the performance of stocks in Chinese firms listed in Hong Kong.
If Hong Kong’s outperformance is sustained, then more funds might be diverted into this market. Chinese equities are still relatively cheap on a global comparison and hence should continue to draw value seekers,” says Dr V K Vijayakumar, chief economist, Geojit Financial Services.
Strong Indian economic fundamentals and growth prospects will continue to make India an attractive destination for investments by foreign portfolio investors, even as the competition from other emerging markets hardens.
FPI Inflow Outlook: What’s Next?
The outlook for FPI inflows into India will remain positive but will continue to undergo the dynamics of global markets and the shifting nature of investor psyche. The long-term growth potential in the Indian economy continues to be intact.
It would be worthwhile to notice that the differential interest rate between India and the U.S. – along with robust macroeconomic indicators of India – is likely to keep attracting FPIs. A more investor-friendly environment that the Indian government is building in collaboration with SEBI’s FPI Outreach Cell will further enhance India as a destination for foreign capital.
Nevertheless, market performance in other markets, particularly Hong Kong, will be watched closely by investors. If the rally in Chinese stocks continues, India may see FPI inflows competing for space in such emerging markets as portfolios diversified by global investors.
Conclusion
FPIs-the foreign portfolio investors-have made a comeback in Indian markets after many favourable factors across the globe and at home. Revival The market has shown recent signs of revival, owing to three factors: the dovish stance of the U.S. Federal Reserve, the interest rate differential, and the historic highs in Indian equities. Competition from other markets-for example, Hong Kong-is less likely to overshadow India’s robust economic fundamentals and proactive policy measures. Still, the prospects for FPI inflows look good, with growth continuing in the coming months, although there could be some volatility due to the dynamics of global markets.