Foreign Investors Withdraw Rs 25,586 Crore from Indian Stocks Due to Election Worries and Strong Chinese

Foreign investors took out a significant Rs 25,586 crore from Indian stocks in May due to worries about the general election results and the better performance of Chinese markets. This outflow is much higher than the Rs 8,700 crore withdrawn in April, which was influenced by changes in India’s tax treaty with Mauritius and rising US bond yields.

In March, FPIs invested a net of Rs 35,098 crore, and in February, they invested Rs 1,539 crore. However, they withdrew Rs 25,743 crore in January, according to data from depositories.

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The election results, expected on June 4, will likely influence FPI flows into Indian stocks in the near future. In the medium term, US interest rates will have a bigger impact on FPI flows, said Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Impact of US Bond Yields

Data shows that FPIs made a net withdrawal of Rs 25,586 crore from equities in May. The high valuations and weak earnings, especially in the financial and IT sectors where FPIs are heavily invested, along with political uncertainties and the appeal of Chinese markets, have led to this FPI selling, explained Vipul Bhowar, Director of Listed Investments at Waterfield Advisors. The main trigger for the FPI selling was the outperformance of Chinese stocks. The Hang Seng index rose 8% in the first half of May, prompting investors to sell in India and buy Chinese stocks, added Vijayakumar. Another factor was the increase in US bond yields. Whenever the US 10-year bond yields rose above 4.5%, FPIs sold in emerging markets like India and moved their money to bonds.

Positive Economic Indicators

Despite the current selling, robust GDP growth, manageable inflation, and political stability could create a positive outlook for the Indian economy, marking a potential turnaround from the net selling in May. The latest GDP growth figures are promising, with Q4FY24 growth at 7.8%, beating the 6.7% expectation, and full-year FY24 growth at 8.2%. Additionally, a record dividend of Rs 2.1 lakh crore from the RBI gives the government more fiscal room to focus on infrastructure spending.

Kislay Upadhyay, smallcase manager and founder of FidelFolio, said these factors could lead to sustained monthly FPI inflows exceeding Rs 30,000 crore if the current government stays in power. Shailesh Saraf, smallcase manager and CEO of Valuestocks, expressed optimism about the Indian markets, expecting the ruling party to retain power and noting a 10% year-on-year increase in corporate profits for March 2024.

Debt Markets

On the debt side, FPIs invested Rs 8,761 crore in debt and Rs 4,283 crore through the debt-VRR (Voluntary Retention Route) in May. Earlier, foreign investors had 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.

Market experts believe the long-term outlook for FPI flows into Indian debt is positive due to India’s inclusion in global bond indices. However, short-term flows are being affected by global economic uncertainty and volatility. Overall, FPIs have withdrawn a net amount of Rs 23,364 crore from equities in 2024 so far, while they have invested Rs 53,669 crore in the debt market.