September 2024 marked a high point for Indian equities as Foreign Portfolio Investors (FPIs) poured in ₹57,724 crore, capping four months of sustained buying. This influx pushed total FPI investments to ₹89,717 crore for the first half of the 2024-2025 financial year. This propelled key stock indices to record heights. The Sensex hit 85,978.25, while the Nifty 50 touched 26,277.35 on September 27.
However, October brought a sharp reversal, with FPIs withdrawing ₹27,142 crore in just three trading sessions. Despite this setback, the year-to-date picture remains positive, with FPIs investing ₹73,468 crore in equities overall.
FPI Buying Trends
September 2024 saw a dramatic shift in Foreign Portfolio Investors (FPIs) sector preferences. In this, financial services emerged as the clear favourite. After experiencing outflows in previous months, the sector attracted a staggering ₹27,199 crore, propelling the Bank Nifty up by over 3%.
Healthcare continued its strong performance, drawing ₹6,639 crore, while real estate captured ₹6,181 crore. Other sectors gaining FPI attention included FMCG (₹4,900 crore), Capital Goods (₹4,002 crore), Consumer Durables (₹3,736 crore), and Telecommunication (₹1,935 crore).
The sudden surge in financial services interest Is driven by FTSE weight increases for ICICI Bank and Kotak Bank. Additionally, non-banking financial companies gained traction due to anticipated interest rate cuts.
FPI Selling Trends
In recent months, Foreign Portfolio Investors (FPIs) have shown a significant shift in their investment strategies, particularly in key Indian sectors. September witnessed a dramatic reversal in consumer services, with FPIs pulling out ₹2,940 crore after a robust ₹4,158 crore inflow in August. The automobile sector continued its downward trend, shedding ₹2,106 crore following August’s ₹2,399 crore sell-off.
The IT sector, previously a favourite, saw a ₹1,219 crore outflow in September, contrasting sharply with August’s ₹4,033 crore inflow. This sudden decrease is attributed to multiple factors. Consumer services face headwinds as demand growth slows, likely due to inflationary pressures and economic uncertainties.
The IT sector’s reversal stems from recent gains being liquidity-driven rather than fundamentals-based, coupled with concerns over U.S. economic uncertainties potentially impacting discretionary spending. These factors have prompted FPIs to recalibrate their portfolios, leading to significant outflows from these once-favourite sectors.
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Factors Influencing FPI Flows
Foreign Portfolio Investors (FPIs) have recently shown a notable shift in their investment strategies. This has caused ripples across various sectors of the Indian market. This change in sentiment has been influenced by a complex interplay of global economic factors and geopolitical events.
The U.S. Federal Reserve’s 50 basis point interest rate cut in September initially boosted FPI inflows, reflecting the global investors search for higher yields. However, this positive momentum was short-lived. Rising geopolitical tensions, particularly the Israel-Iran conflict, prompted a swift reversal, leading to significant outflows.
The volatility in oil prices has emerged as another crucial factor shaping FPI decisions. With crude oil prices on an upward trajectory, sectors such as oil & gas are experiencing reduced foreign flows. This trend highlights the sensitive relationship between commodity prices and investment patterns, as investors reassess their portfolios to mitigate potential risks associated with fluctuating energy costs.
Perhaps most intriguingly, the performance of the Chinese market has become a pivotal factor in recent FPI movements. The sudden selling in Indian equities has been largely attributed to the outperformance of Chinese stocks. The Hang Seng index surging an impressive 26% in just a month is a testament to this change.
This bullish trend in China, fueled by attractive valuations and anticipated economic improvements from stimulus measures, has redirected global investor attention. This shift, combined with escalating geopolitical tensions and rising crude oil prices, has prompted foreign investors to recalibrate their portfolios, leading to a notable exodus from Indian equities.
Broader Market Impact and Future Outlook
FPIs have been pivotal in shaping the Indian equity market landscape in recent months. Their activities have led to significant market movements, with September inflows propelling markets to unprecedented heights, only to be followed by a sharp correction in October due to sudden outflows.
This volatility underscores the substantial influence FPIs wield over Indian markets and highlights the need for investors to stay attuned to these trends. The debt market supports this story, with FPIs withdrawing ₹1,977 crore through the General Limit while simultaneously withdrawing ₹880.84 crore via the Voluntary Retention Route (VRR) in early October.
Looking ahead, several factors will influence FPI flows. Investors will closely watch the Q2 earnings season and the upcoming Reserve Bank of India (RBI) monetary policy announcement. Global developments, including the Israel-Iran conflict, U.S. dollar movements, and potential further Fed rate cuts, will also play crucial roles. Global factors like geopolitical developments and interest rate trends will be key in determining foreign investment flows into Indian equity markets.
In conclusion, while FPI trends have been largely positive in 2024, recent outflows highlight the volatile nature of these investments. Domestic investors might find opportunities in sectors facing FPI outflows. This is particularly true in high-quality banking stocks, which have become attractively valued due to recent selling.
As India continues to navigate global economic uncertainties, maintaining robust domestic growth and stable policies will be crucial in sustaining FPI interest. Investors should stay alert to both domestic and international factors that could sway FPI decisions in the coming months.
Written By Fazal Ul Vahab
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