FPIs withdraw Rs 44,396 crore from Indian equities in January; what's next?

Foreign Portfolio Investors (FPIs) have pulled out Rs 44,396 crore from Indian equities in January so far, influenced by a strengthening US dollar, rising bond yields, and expectations of a weak earnings season. This follows a more optimistic inflow of Rs 15,446 crore in December, according to depository data.

Experts point to several factors contributing to this shift in investor sentiment. Himanshu Srivastava, Associate Director at Morningstar Investment Advisers India, noted that the depreciation of the Indian rupee is increasing pressure on foreign investors, prompting them to withdraw from the Indian market. Additionally, the higher valuation of Indian equities, despite recent corrections, and concerns over economic growth uncertainty are making investors more cautious.

So far this month, FPIs have been net sellers, selling shares daily except on January 2. Analysts like V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, attribute the selling to the strength of the dollar and rising US bond yields, which make emerging markets like India less attractive. With the dollar index above 109 and US bond yields over 4.6%, FPIs are shifting their investments away from India, which is considered one of the more expensive emerging markets.

In addition to equities, FPIs have also been pulling funds from the Indian debt market, with net outflows of Rs 4,848 crore from the debt general limit and Rs 6,176 crore from the debt voluntary retention route.

Despite the current trend, some experts suggest that a cyclical recovery in corporate earnings and stronger GDP growth, driven by robust domestic consumption and increased government infrastructure spending, could potentially reverse these outflows. However, the overall trend in 2024 highlights a cautious stance from foreign investors, who significantly reduced their Indian equity investments, leading to net inflows of only Rs 427 crore for the year. This marks a sharp contrast to the Rs 1.71 lakh crore in net inflows seen in 2023, driven by optimism surrounding India's economic fundamentals. In comparison, 2022 saw a net outflow of Rs 1.21 lakh crore amid aggressive global rate hikes.