FPIs withdraw Rs 28,200 crore from Indian stocks on political uncertainty amid general election

Foreign Portfolio Investors (FPIs) have withdrawn out a huge Rs 28,200 crore from Indian stocks so fare this month, citing uncertainty over the result of the general elections and favourable values in Chinese markets.

The outflow was much greater than the net withdrawal of over Rs 8,700 crore in April due to fears about a change in India's tax treaty with Mauritius and a persistent rise in US bond yields.

Previously, FPIs invested a total of Rs 35,098 crore in March and Rs 1,539 crore in February.

Political stability would draw significant inflows into the Indian market, according to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Following the Lok Sabha elections, FPI inflows into India may increase due to three key factors: potential interest rate cuts by the US Federal Reserve, positive resolutions to global geopolitical tensions, and India's growing weight in the MSCI Emerging Markets Index, which is expected to exceed 20% by mid-2024, according to Karthick Jonagadla, smallcase Manager and founder of Quantace Research.

According to the data with the depositories, foreign portfolio investors experienced a net outflow of Rs 28,242 crore in equities this month (till May 17).

There are two main reasons why FPIs have been selling in FY2025. First, there's uncertainty about the general elections. FPIs generally don't like uncertainty; they prefer to play it safe and lock in the profit they made last year. Second, the market valuations are high, MojoPMS Chief Investment Officer Sunil Damania said.

In addition, FPIs are reallocating funds to China and Hong Kong, which are trading at attractive (cheaper) valuations compared to Indian stocks, Anirudh Naha, CIO-Alternatives of PGIM India Asset Management, said.

Vijayakumar believes that the main trigger for the FPI selling has been the outperformance of the Kong Kong index Hang Seng, which shot up by 19.33 per cent during the last one month. They are moving money from expensive markets like India to cheap markets like Hong Kong.

Further, FPIs withdrawal could be attributed to the ongoing geopolitical crisis in the Middle East, relative valuation discomfort, and the strength of US bond yields, Vipul Bhowar, Director, Listed Investments, Waterfield Advisors, said.

On the other hand, FPIs invested Rs 178 crore in the debt market during the period under review.

"With economic challenges, such as recessionary pressures and inflationary concerns, along with geopolitical tensions, it's not surprising to see volatility in FPIs. This situation has made investors cautious," Bharat Dhawan, Managing Partner of Mazars in India, said.

Before this outflow, foreign investors put in Rs 13,602 crore in March, Rs 22,419 crore in February, and Rs 19,836 crore in January. This inflow was driven by the upcoming inclusion of Indian government bonds in the JP Morgan Index.

JP Morgan Chase & Co in September last year announced that it will add Indian government bonds to its benchmark emerging market index from June 2024. This landmark inclusion is anticipated to benefit India by attracting around USD 20-40 billion in the subsequent 18 to 24 months.

Overall, FPIs withdrew a net amount of Rs 26,000 crore in equities in 2024 so far. However, they invested Rs 45,000 crore in the debt market.

With agency inputs