FPI Inflows Plunge: High Valuations and Market Shifts Slash Investments in Indian Equities

Foreign investors became more cautious in August, investing only Rs 7,320 crore in Indian stocks. This is a significant drop compared to Rs 32,365 crore in July and Rs 26,565 crore in June, according to data from depositories. The main reasons for this slowdown are the high valuations of Indian stocks and the unwinding of the Yen carry trade after the Bank of Japan raised interest rates.

Outlook for September: Caution Ahead

Looking ahead, September may still attract interest from Foreign Portfolio Investors (FPIs), but several factors will influence their decisions. These include domestic political stability, economic indicators, global interest rate trends, market valuations, sectoral preferences, and the appeal of the debt market, according to Vipul Bhowar, Director of Listed Investments at Waterfield Advisors.

High Valuations Deter FPIs

The primary reason for the lower FPI inflows compared to the previous two months is the high valuation of Indian stocks. With the Nifty index trading at over 20 times the estimated earnings for FY25, India is currently the most expensive stock market in the world.

Shift in Investment Strategy

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, pointed out that FPIs have more attractive investment opportunities in other, less expensive markets, making them less inclined to invest in India. Additionally, the unwinding of the Yen carry trade on August 24 led to significant selling of Indian equities by FPIs. This coincided with growing fears of a potential recession in the US and disappointing economic data, further impacting market sentiment, according to Bhowar.

Interestingly, FPIs have been selling in the secondary market, where valuations are high, and redirecting their investments to the primary market, where valuations are more reasonable.

FPIs Turn to the Debt Market

Meanwhile, FPIs invested Rs 17,960 crore in the Indian debt market in August.

Experts believe that several factors have driven FPIs to invest in debt, including India’s inclusion in global bond indices, attractive interest rates, stable economic growth, a shift from equities, and a positive long-term outlook.

Impact of Global Bond Indices

Vishad Turakhia, Managing Director at Equirus Securities, noted that the investment in debt is largely driven by index inclusion flows, particularly since JP Morgan announced India’s inclusion in its bond index last October.

Nimesh Chandan, CIO of Bajaj Finserv Asset Management Ltd, added that India’s inclusion in global bond indices and attractive yields have drawn FPIs to the debt market.

Geojit’s Vijayakumar also mentioned that FPIs are buying in the debt market because the Indian Rupee (INR) has been stable this year, and this stability is expected to continue.

Year-to-Date Investment Summary

So far in 2024, FPIs have invested Rs 42,885 crore in equities and Rs 1.08 lakh crore in the debt market.