FPIs may adopt a cautious stance until the election results are clear

In FY2024, we have witnessed a turnaround in inflows in India. There was total net inflow of Rs 2,82,338 crores for both equity and debt, as against a net outflow the previous year.

Factors which have contributed to the inflows are as under:

1. Volatility in :

After September 2023, the US 10-year bond yields rose above the range of 3.5%-4%, where it had settled for the past one year. As a result, Indian markets witnessed a major outflow of .

The trend reversed in December 2023 and the 10-year US bond yields fell to 3.9%. Stabilised US bond yields diverted investors towards emerging markets, including India.

The changing expectations around Fed rates were captured to an extent by the movement in the US 10-year yield. For FPI, the interest rate differentials determine the direction of flows.

As the expectations of a softer interest rate increase, there will be an outflow from the US.

2. State in India:

The results of state in India in early December 2023 was a positive. Investors looked at the victory of the ruling party at the Centre as an indicator of a stable government and policy continuity in the May 2024 general elections.

Further, strong numbers for Q2 FY2023-24, clocking 7.6% y-o-y growth and tax buoyancy, boosted investor sentiment.

3. Low oil prices:

Crude prices stayed low during December 2023, touching a low of US$ 74/barrel. This helped revive investor interest in India due to the potential savings in India’s huge oil bill and therefore its Current Account Deficit. The low prices are likely to keep India’s macro economy in good health.

4. Equity outlook:

FPI inflows into equity totalled US$ 20.7bn in 2023, a 3-year high. In the past 20 years, FPI have exceeded US$ 20bn only 5 times. Close to 30% of the inflows were concentrated in December 2023 alone.

The strong profitability of India Inc along with a stable monetary policy regime has increased India’s attractiveness in the eyes of foreign investors. In Rupee terms, 2023 saw the highest even equity inflows on record.

The inflow by foreign investors was also reflected in the relative outperformance of the Sensex vis-à-vis other global markets. Amongst Emerging Markets, Indian indices were the best performer, registering a growth rate of ~29%.

5. :

Debt inflows into India witnessed a turnaround in 2023 and recorded inflows of Rs 56,412 crore in CY23 and Rs 40,149 crore in CY24 till date.

Of this, almost 50% came between November 2023 and December 2023, amidst a sharp correction in US yields. The last time there were positive inflows into the debt segment was in CY2017 and before that in CY2014. The other years witnessed only outflows.

The reason for the inflows has been India’s inclusion in the JP Morgan Bond index and the Bloomberg Emerging Market Index.

There was an Indian FPI debt outflow in April 2024, triggered by the 10-year US treasury Bond Yield spiking from 4.10% at March-end to 4.70% by end-April on the back of expectations of slow and lesser-than-expected rate cuts by the Fed Reserve.

While the overall sentiment is positive, there continue to be inflows and outflows. For example, foreign investors pulled out a massive Rs 17,000 crore from Indian equities in May 2024 owing to the general elections and the uncertainty surrounding its outcome, coupled with expensive valuations and profit booking. This caused a small correction in the equity markets.

FPI inflows are good for us to boost liquidity in the markets - the turnaround is attributable to India’s buoyant growth macros and improved corporate profitability.

This trend is likely to continue even in FY2025 as India maintains its place as the fastest growing major economy in the world.

While FPIs may adopt a cautious stance until the election results are clear, favourable outcomes and established political stability could see their return in significant numbers.

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