FPIs continue aggressive selling post-Budget: Pull out ₹20,919 crore since July 23

Experts have highlighted the potential impact of US economic developments, including fears of a recession and a likely US Federal Reserve rate cut, on FPI flows into India.

After pumping  in ₹32,365 crore in July, foreign portfolio investors (FPIs) have begun this August on a cautious note, net selling of equities of ₹1,027 crore in the two trading days so far this month.

After the budget, they continued  to be aggressive sellers, pulling out ₹20,919 crore since July 23. The fast-paced changes in the US economy, including increased fears of a recession and likely US Fed rate cut in September, could set the trend for FPI flows in August, said experts and market watchers. 

So far this calendar year, FPIs have net invested ₹ 34,539 crore, data with depositories showed. This was significantly lower than the flows from domestic institutional investors (DII), including mutual funds. The strong inflows into equity mutual fund schemes have fuelled stock market indexes in the last ten months.

US economic developments

K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said FPI investment has been inconsistent recently alternating between buying and selling. This is in sharp contrast to the consistent buying by DIIs, he said. 

“Going forward, there are some developments that can impact FPI flows. The sharp drop in job creation in the US and the rising unemployment indicates the rising possibility of a recession in the US, which, so far, the market has ruled out. The possibility of a rate cut by the Fed in September is very high. 

Consequently, the US 10-year bond yield has fallen sharply to 3.79 per cent. Even though this is positive for FPI inflows into emerging markets like India, FPIs may think of pulling more money out of India since India is the most expensive emerging market now”, Vijayakumar said. 

The developments in the US economy and markets in the coming days will set the trend for FPI in August, he added.

Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services, BDO India, said FPIs are taking  a cautious approach, keeping in mind the concerns raised by the US Fed Reserve and booming geopolitical tensions in the Middle East, which indicate early signs of recession.

“Considering the larger picture, the offshore fraternity has got the message from the Budget proposals that India is the market to invest from a long term perspective. The roadmap is now laid for India’s future prospects that would further solidify India’s footprint on the international platform”, Purohit said.

Vipul Bhowar, Director Listed Investments, Waterfield Advisors, said a potential rate reduction by the US Federal Reserve may incentivise FPIs to amplify their investments in India as they seek higher returns. However, concerns surrounding a looming recession or stagnant job growth in the US could prompt FPIs to adopt a more cautious approach, potentially resulting in investment flow volatility. 

Milind Muchhala, Executive Director, Julius Baer India, said that over the past few years, the FPI activity has remained extremely muted in the Indian equity markets, and as a result, their overall ownership percentage has been declining. “However, we believe that India with its superior economic and earnings growth and improving macro environment, remains one attractive investment destination for the FPI community, and as and when there are opportunities in the market, they would be looking at committing more money in the country”, Muchhala said.

“Albeit the short term volatility, we remain constructive on the FPI flows over the period”.

Vaibhav Porwal, Co-founder, Dezerv, said that FPI flows into India should increase due to several factors. Firstly, India’s economy performs  better than many global peers, making it an attractive destination for investors. 

Secondly, with the risk-free rate expected to come down in the US, investors will likely seek better returns elsewhere, including in India. 

Thirdly, the government’s robust fiscal discipline could lead to a rating upgrade for India, enhancing its investment appeal. 

Additionally, valuations of large-cap stocks, where FIIs typically invest, are currently at reasonable levels. Lastly, uncertainties like elections and budget announcements are behind us, providing a more stable investment environment, he said.