After 3 straight months of infusing over ₹40,000 crore in Indian equities, the pace of inflows by foreign portfolio investors (FPIs) ebbed in August. FPIs bought Indian equities worth ₹12,262 crore in the month of August on the back of higher crude oil prices and resurfacing inflation concerns. Meanwhile, FPI flows in the cash market also turned negative in August after strong positive flows in the previous three months.
The weaker pace of FPI inflows also drove the Indian benchmarks in the red in August, after 4 consecutive months of strong returns. The Nifty index fell 2.5 percent in the previous month on the back of a rise in US bond yields, and other macro concerns. Experts believe this prompted FPIs to flee emerging market equities, including India, towards US securities.
Before this, Nifty jumped as much as 2.9 percent in July, in the green for the fifth straight month, after a 3.5 percent rise in June, a 2.6 percent jump in May, a 4 percent rally in April, and a 0.3 percent gain in March.
However, on a positive note, despite the decline, August remained the 6th consecutive month of inflows by foreign investors. The net inflow was at ₹46,618 crore in July, ₹47,148 crore in June, and ₹43,838 crore in May. Before that, ₹11,631 crore was infused in Indian equities in April and ₹7,935 crore in March, data with the depositories showed.
However, in the first 2 months of the current calendar year, FPI investments were in the red. They sold equities worth ₹28,852 crore in January and ₹5,294 crore in February. Overall, in 2023 YTD, the FPIs have made inflows worth ₹1.35 lakh crore.
In terms of sectors, FPIs are consistently buying capital goods. And, lately, they have started selling in financials.
Apart from equities, FPIs invested ₹5,950 crore in the country's debt market during the period under review, taking the total investment by FPIs to ₹28,181 crore in the debt market so far this year. This is the highest amount invested in debt by FPIs in the past six years. Before this, the month of June saw the highest FPI inflows into debt securities at ₹10,325 crore.
The calendar year 2023 is also the first time in 4 years, FPIs have become net buyers of Indian debt. Before this, FPIs were net buyers of Indian debt in 2019, when they invested ₹24,058 crore into bonds.
Going ahead, the poor monsoon in August may keep inflation elevated which will impact the sentiments in the market and might affect the FPI investment too. Experts believe that FPIs have adopted a wait-and-watch approach to watch out for macroeconomic concerns like inflation and how central banks deal with it. Furthermore, a rise in crude oil prices and US bond yields will also turn foreign investors away from riskier markets in favour of safer options like US treasuries.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services
Strength in the dollar index and the US 10-year bond yield remaining well above 4 percent is a short-term negative for FPI flows to emerging markets like India. FPIs continue to be buyers in financials, capital goods and financials and also in IT selectively. A significant trend in the market is that FPI selling is countered by strong DII buying. In view of the strong dollar and high US bond yields FPIs may continue to sell in India. Also, since the markets have rallied smartly during the last three months, some profit booking by FPIs would be rational and can be expected.
Pradeep Gupta, Co-founder & Vice Chairman, Anand Rathi Group
Among the top 20 equity markets of the world by market capitalisation, the performance of Indian equities between 2000 and 2023 in the US dollar terms, on average, has been second only to Brazil for an investment horizon of one year. For others including 3-, 5-, 10-, 15- and 20-year time horizons, Indian equity has been the best performer among all the peers. The consistent top performance of Indian equities for over a 20-year period is a strong reason for the continuation of cross-border portfolio equity capital inflows to India.
Also, during the same time horizon, India has made rapid transformations in almost all spheres including economic progress, infrastructure development, institutional strengthening, external sector health, and progress in science and technology. With such a multidimensional transformation, the outlook for Indian equities for the next couple of decades also looks promising. This is also a compelling reason for strong capital inflows towards India.