FPIs have remained avid participants in the equity markets of India throughout the year, continuing the streak of investments into the third continuous month. However, the momentum that was seen in June and July started losing steam in August 2024, driven by both domestic and global factors. Despite this slowdown, FPIs continued to be present and added to India’s capital inflow. However, since the beginning of FY25, this trend of aggressive buying has significantly toned down.
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June and July: A Period of Robust FPI Activity
The months of June and July of 2024 were months of continuous heavy FPI investments. This was in comparison to a few months of ambiguity over India’s election cycle, which had scared off the investors. With the end of elections and the return of political and market stability, foreign investors once again evinced confidence in Indian equities.
In these months, FPIs provided the main fillip for market gains. Driven by good economic performance of India, promise of stable governance along with good global market conditions, FPIs saw their investments surge and increased manifold the Indian equity market during that time.
August 2024: FPI Investment Momentum Shifts
August was thus a rather sober month for FPIs after two months of aggressive buying in June and July. According to data from the National Securities Depository Limited, or NSDL, FPIs have invested ₹7,320 crore in Indian equities as of August 30, 2024. While investment was positive, the number had decelerated from the previous two months.
This moderation in inflows reflects a combination of domestic and global factors that began to affect investor sentiments. Rising global inflationary pressures, volatile commodity prices, and geopolitical tensions in some parts of the world had managed to persuade FPIs to adopt a more measured pace in their investments in India.
A Broader Look at FPI Inflows
FPIs are not investing only in equities but are pouring money into debt, hybrid, and debtVRR instruments. As per NSDL data, net investments in all these segments were ₹ 25,493 crore as of August 30, 2024. This is the total inflow in the Indian markets because FPIs would diversify their portfolios across different classes of assets.
One of the key highlights for FPI action in August was infusion into the Indian debt market, seen at ₹17,960 crore. This shows very clearly that besides being interested in equities, FPIs are making the most of the offer in the debt segment when interest rates are rising globally and yield better returns in fixed-income securities.
Domestic and Global Factors Affecting FPI Sentiment
Several factors contributed to the moderation in FPI inflows during August:
Global Inflation Fears: Inflation continues to haunt most parts of the world, from the United States to Europe. The central banks in these advanced economies resorted to raising interest rates due to the menace caused by inflation, thereby making bonds and other fixed-income instruments relatively attractive vis-a-vis equities. The FPIs have, therefore, turned wary and choosy in selecting equity investments, safely parking themselves in safer havens during uncertainty.
Unpredictable Commodity Prices: The prices of major commodities, such as oil, natural gas, and metals, have continued to fluctuate wildly. These changes have disturbed inflation and general economic stability in many countries worldwide. This uncertainty has turned some investors cautious, particularly about emerging markets like India.
Geopolitical tensions also played a major part in continuous conflicts and tensions in parts of the world, particularly in regions that enjoy close economic ties with India. Issues related to trade wars, sanctions, and diplomatic disagreements have had ripple effects on world markets.
Reason: imminent hike in US interest rates. With the US Federal Reserve raising interest rates in its battle to contain inflation, many investors have shifted to US Treasuries and other dollar-denominated assets for safer returns. Admittedly, this factor has dulled the luster of emerging markets, not excluding India, somewhat. How will this impact the FPI outlook for the rest of FY25?
Although there is a reason to be concerned because the FPI inflows slowed in August, the bigger outlook for the rest of fiscal 2024-25 looks upbeat. The economic fundamentals of India are strong, and it remains a bright spot for foreign investors, particularly in technology manufacturing and renewable energy.
Analysts feel that this could revive once the situation in the global economy stabilizes. Once inflation starts to cool off and global commodity prices turn predictable, FPIs might again start buying aggressively in Indian equities. Also, India’s domestic market remains one of the fastest-growing in the world, with long-term investment opportunities galore.
Conclusion: A Temporary Slowdown, Not a Shift in Sentiment
The moderation in FPI inflows during August 2024 can thus be considered a transient response to the difficult global environment. There are sufficient factors that will lead investor behavior, and the long-term outlook for FPIs in India remains propitious. With an accomplished economic foundation, coupled with continuous reforms at making India an even more attractive investment destination, FPIs will most likely keep their engagement in Indian markets going.
As we move into the later months of FY25, both domestic and global factors will be very important to watch and see how they drive FPI sentiment. But as of now, it appears that though inflows might be erratic, FPIs are committed to India’s growth story, though with a less optimistic approach in the near term.