FPI reduces stake from equities in May on poll jitters, attractive valuations in China

In May, foreign investors withdrew a substantial Rs 25,586 crore from Indian equities amidst uncertainty surrounding the general election outcome and the remarkable performance of Chinese markets. This figure represents a significant increase compared to the net outflow of over Rs 8,700 crore in April. The concerns in April were primarily driven by apprehensions about alterations in India's tax treaty with Mauritius and a sustained rise in US bond yields. Prior to these events, Foreign Portfolio Investors (FPIs) made a net investment of Rs 35,098 crore in March and Rs 1,539 crore in February. However, they withdrew Rs 25,743 crore in January.

The upcoming election results, set to be announced on June 4, could profoundly influence FPI flows into Indian equities in the immediate future. Moreover, in the medium term, fluctuations in US interest rates are expected to exert more influence on FPI flows, according to Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Data indicates that FPIs made a net withdrawal of Rs 25,586 crore from equities in May. Several factors contributed to this trend, including relatively high valuations, weak earnings, particularly in the financial and IT sectors where FPIs have a substantial allocation, and political uncertainties surrounding the election outcome. Additionally, global risk-off sentiment and the attractiveness of Chinese markets further prompted FPI selling, as highlighted by Vipul Bhowar, Director of Listed Investments at Waterfield Advisors.

The surge in Chinese stocks, with the Hang Seng index soaring 8 per cent in the first half of May, compounded the selling pressure on Indian equities, as mentioned by Vijayakumar. Another contributing factor was the spike in US bond yields, which led FPIs to reallocate funds from emerging markets like India to bonds.

However, despite the challenges, robust GDP growth, manageable inflation, and political stability could pave the way for a positive outlook for the Indian economy, potentially reversing the trend of net selling observed in May. Notably, the recently released GDP growth figures for Q4FY24 exceeded expectations, coming in at 7.8 per cent, while the full-year FY24 growth stood at 8.2 per cent. Furthermore, the record dividend of Rs 2.1 lakh crore from the RBI provides the government with additional fiscal space to prioritize infrastructure spending.

Kislay Upadhyay, smallcase manager & Founder of FidelFolio, anticipates that if the current government retains power, monthly FPI inflows could exceed a sustained Rs 30,000 crore.

Market experts, such as Shailesh Saraf, smallcase Manager and CEO of Valuestocks, express bullish sentiments regarding the Indian markets, citing expectations of the ruling party's reelection and a significant Year-on-Year increase in corporate profits for March 2024.

In contrast to the outflow from equities, FPIs invested Rs 8,761 crore in debt and Rs 4,283 crore through debt-VRR (Voluntary Retention Route). This inflow was driven by the impending inclusion of Indian government bonds in the JP Morgan Index. Long-term prospects for FPI flows into Indian debt appear positive due to India's inclusion in global bond indices. However, near-term flows are susceptible to global macroeconomic uncertainties and volatility.

Overall, FPIs withdrew a net amount of Rs 23,364 crore from equities in 2024 so far, while simultaneously investing Rs 53,669 crore in the debt market.

(With inputs from agencies.)

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