Market Jitters. FPIs exercise caution amid US yield surge, await June 4 electoral results

After pumping in $25 billion into Indian equities in 2023-24, FPIs have begun FY25 on a sombre note, turning net sellers of over $1.05 billion (₹8,671 crore) in April.

Data with depositories showed that they were net sellers on the debt side, too, with outflows of $1.3 billion (₹10,949 crore) in April this year, data with depositories showed. In 2023-24, FPIs had pumped in about $14.5 billion in Indian debt, with the bulk of the infusion happening in the second half of that fiscal year after the J P Morgan’s Bond Inclusion announcement in September 2024.

In May this year, the FPIs have net invested ₹1,156 crore in equities and net sold ₹1,727 crore in the debt segment. 

Depositories data showed that till May 3 this calendar year, FPIs had invested ₹43,182 crore in debt segment and ₹3,378 crore in equities.

FPIs turn net sellers

FPIs turning net sellers in both equities and debt in April 2024 comes as the country is going through a seven- phased general elections that commenced on April 19 and are due to end on June 1.  FPIs holding/ ownership of Indian stocks is currently at a decadal low of about 16.1 per cent. 

This past week, the Indian volatility index Nifty VIX — which denotes volatility expectations — surged 40 per cent to close at 14.62 after cracking down to around ten in the previous week.

Tarun Singh, Founder and Managing Director of Highbrow Securities, said “While there is a tentative optimism about the influx of FPIs into India during this period, the confluence of internal political dynamics and global economic pressures offers a complex scenario for these investors. 

These mixed signals show that FPIs are dipping their toes in, but mostly they’re sitting on the sidelines, carefully watching how things play out both here and around the world before making any big moves”.

Rising VIX

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that rising VIX is indicative of potential volatility, and the market can become highly volatile in the short run.

“The Indian market is at record highs. There has been a pre-election rally. It is not as strong as in the past. ⁠More than anything else, FPIs will respond to changes in the US bond yields. If the US bond yields fall and the Indian economy and markets do well they will turn aggressive buyers”, Vijayakumar added.

Manoj Purohit, Partner & Leader - Financial Services, Tax & Regulatory Services, BDO India, said that FPIs are taking a cautious approach to infusing funds in the capital markets.

FPIs are sensitive to global trends, and considering the growth trajectory of the Indian economy, it is likely that the momentum will increase towards India in the coming weeks, he said,

“The recent announcements by the SEBI on permitting NRIs, OCIs etc to infuse upto 100 per cent in FPIs will certainly bring back the focus to India as a financial hub. Further, IFSCA permitting nonbanking entities to issue ODIs will drive the P-Note markets in IFSC making it more deeper and attractive for foreign funds”, Purohit added.

Short-term trends uncertain

Vijayakumar noted that two days of trade in May is too short to indicate any trend. He said that trends can change in response to US bond yields and domestic triggers. 

He said that the US Fed’s decision indicates rate cuts much lower than expected earlier this year. Inflation has turned stubborn at lower levels. However, the latest job data in the US indicates a slowing economy, and, therefore, rate cuts may be necessitated, according to Vijayakumar. “The wage increase falling below 4 percent also reflects a weakening labour market. From the stock market’s perspective this is good news. That’s why the US markets rallied sharply on Friday”, he said.