FPI inflows moderated to ₹7,320 crore in August: 5 key factors behind the sell-off

Foreign Portfolio Investors (FPI) Indian equity investors continued their three-month streak but inflows moderated in August, driven by domestic and global factors. However, they were consistent buyers in June and July after election-related jitters subsided and stability returned to Indian markets. However, FPIs halted their buying spree with the start of the new fiscal year 2024-25 (FY25).

Inverted FPIs ₹7.320 crore worth of rupees Indian stocksand net investment stood at ₹25,493 crore as of August 30, taking into account debt, hybrids, debt-VRR and equity, according to data from National Securities Depository Ltd (NSDL). Total investment in debt markets stood at Rs 25,493 crore as of August 30, taking into account debt, hybrids, debt-VRR and equity, according to data from National Securities Depository Ltd (NSDL). ₹17,960 crore in August.

Read also: Independence Day 2024 | FPIs are excited ₹64,824 crore in Indian stocks in 12 months: 5 key reasons behind the inflows

“FPI investment in equities has been declining steadily recently, with net investment of only ₹7.32 billion rupees in August compared to ₹“In July, FDI securities investments stood at Rs 32,365 crore. Most of the buying by foreign investors is through the ‘primary market and others’ category. They have been consistent sellers in the spot market due to high valuations,” said Dr VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

What is driving the FPI sell-off in Indian markets?

1. High valuation of Indian stock market

According to Dr VK Vijayakumar of Geojit, the key reason for the low interest of foreign investors is the high valuation in the Indian market. “With Nifty now trading at over 20 times estimated earnings for FY25, India is the most expensive market in the world. Foreign investors have opportunities to invest in cheaper markets, so their priority is markets other than India,” he said.

Vaibhav Porwal, co-founder of Dezerv, agrees. “Valuations in the Indian stock market have risen to relatively high levels, prompting foreign investors to exercise caution while investing in India. They have been selectively investing in defensive market segments, focusing on sectors such as healthcare and FMCG,” Porwal said.

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Market analysts reiterated that FPIs have been engaged in mixed activity recently, with buying and selling spurts, a trend that is likely to continue for some time. “FPIs have been selling in the secondary market, where valuations are perceived to be high, and redirecting their investments towards the primary market, which offers relatively lower valuations,” said Vipul Bhowar, Head – Listed Investments, Waterfield Advisors.

2. Dismantling the yen

According to Vipul Bhowar of Waterfield Advisors, the unwinding of yen carry trades on August 24 significantly impacted the FPI performance, leading to significant sell-offs in Indian stocks. In response to Bank of Japan Governor Kazuo Ueda’s hawkish tone at the July monetary policy meeting, speculators unwound their yen carry trades, fueling the yen’s strengthening. The term refers to borrowing Japan’s cheap currency to invest in countries offering higher returns.

3. Bets on a rate cut by the US Federal Reserve

“The yen’s depreciation coincided with growing fears of a possible US recession and disappointing economic data, which further exacerbated the market reaction,” said Waterfield’s Bhowar.

Statement by US Federal Reserve Chairman Jerome Powell in Jackson Hole Signs of imminent rate cuts and increased confidence in a soft landing helped prop up emerging markets, including India. Market analysts say foreign direct investment flows are expected to remain volatile due to high bets on rate cuts.

“The US Federal Reserve is expected to start its rate cutting cycle in September. Historically, rate cutting cycles in the US market have not been favourable for its equity markets. We expect foreign investors to shift their attention to emerging markets and allocate capital to places where valuations are more attractive. However, India may not be a significant beneficiary of these flows,” said Vaibhav Porwal of Dezerv.

4. Tax changes announced in the 2024 Union Budget

Market analysts said the increase in capital gains tax and the removal of indexation benefit were some of the factors that resulted in a higher tax burden on investors. Another factor was the increase in the securities transaction tax (STT) rate for FnO transactions, which will impact liquidity and make hedging more expensive.

“PFIs can choose to prioritise sectors that benefit from domestic reforms and growth, such as technology and infrastructure, while cautiously addressing sectors vulnerable to global economic shocks,” Bhowar said.

5. Shift towards debt instruments

According to Dr VK Vijayakumar of Geojit, foreign investors are buying in the debt market primarily because the INR has remained stable this year and this is expected to continue. “As for the debt market, the strong buying trend among foreign investors can be traced back to India’s addition to JP Morgan’s emerging market government bond indices in early June,” said Vaibhav Porwal of Dezerv.

Analysts added that the recent announcement of a capital gains tax hike on equity investments has also prompted foreign portfolio investors to sell their holdings, shifting funds into safer debt instruments.

“Inclusion in global bond indices, attractive interest rates, stable economic growth, shift away from equities and favourable long-term outlook have been the key factors driving FPIs to invest in debt,” said Vipul Bhowar of Waterfield Advisors.

Read also: FPI sell-off increases ₹21,201 crore in Indian equities due to domestic and global factors; when will inflows resume?

When will FDI inflows resume?

Analysts say the selling trend is likely to continue as India is the most expensive market in the world at present and “it is rational for foreign investors” to sell here and shift money to cheaper markets. “This outlook does not change even if the market turns more optimistic on fears of the US recession easing,” said Dr VK Vijayakumar.

“While FPI interest is likely to continue in September, flows would be determined by a combination of domestic political stability, economic indicators, global interest rate movements, market valuations, sectoral preferences and the attractiveness of the debt market,” said Vipul Bhowar of Waterfield Advisors.

Disclaimer: The opinions and recommendations offered in this analysis are those of individual analysts or brokerage firms, not those of Mint. We strongly recommend that investors consult with certified experts before making any investment decisions as market conditions can change quickly and individual circumstances may vary.