FPI inflows into Indian equities drop sharply in 2024; rebound anticipated in 2025

New Delhi: After a robust 2023, foreign investors significantly scaled back their investments in Indian equities in 2024, with net inflows amounting to over Rs 5,000 crore, as elevated domestic valuations, coupled with geopolitical uncertainties prompted investors to adopt a more cautious stance.

Looking ahead to 2025, FPI flows into Indian equities could see a recovery, supported by a cyclical upswing in corporate earnings, particularly in domestic-oriented sectors like capital goods, manufacturing, and infrastructure, Vinit Bolinjkar, Head of Research, Ventura Securities, said.

However, elevated valuations and cheaper alternatives in other emerging markets, such as ASEAN and Latin America, could constrain these inflows.

Additionally, lingering concerns over a prolonged global recession may weigh on investor sentiment and appetite for risk assets, he added.

On the other hand, Feroze Azeez, Deputy CEO at Anand Rathi Wealth Ltd, believes geopolitical escalations, central bank interest rate cuts, and potential US tariff sanctions could act as tailwinds for FPI inflows into Indian markets.

As of now, foreign portfolio investors (FPIs) have made a net investment of over Rs 5,052 crore in the Indian equity markets and Rs 1.12 lakh crore in the debt market (till December 24), as per data available with the depositories.

This follows the extraordinary Rs 1.71 lakh crore net investment in equities in 2023, driven by optimism surrounding India's resilient economic fundamentals. In contrast, 2022 witnessed the worst net outflow of Rs 1.21 lakh crore due to aggressive rate hikes by global central banks.

Prior to the outflow, FPIs invested money in the last three years (2019, 2020 and 2021).

In 2024, FPI outflows were recorded during the months of January, April, May, October, and November.

The drastic decline in FPIs flow in 2024 stems from a combination of global and domestic factors.

The reduced inflow into Indian equities was primarily driven by elevated valuations, prompting investors to redirect their investment to attractively valued Chinese equities, Himanshu Srivastava, Associate Director of Manager Research, Morningstar Investment Research India, said.

This shift was further fuelled by a series of stimulus measures introduced by China to bolster economic growth, making its equities increasingly appealing.

In addition, heightened geopolitical tensions, particularly the Israel-Iran conflict, increased risk aversion, pushing investors toward safer assets.

Caution ahead of the US Presidential election and concerns over fewer US Fed rate cuts next year, despite this year's 100 bps cuts, further dampened sentiment, he added.

On the domestic front, factors like high valuations, weak corporate earnings for the September quarter, expectations of subdued results for December, rising inflation, slower GDP growth, and a depreciating rupee have weighed on investor confidence, Narender Singh, smallcase Manager and Founder at Growth Investing, said.

In contrast to equities, FPIs have shown a marked preference for Indian debt markets, investing Rs 1.12 lakh crore in 2024, up from Rs 68,663 crore in 2023.

This trend has been significantly influenced by India's inclusion in JP Morgan's Government Bond Index, with expectations of further inclusion in other major global bond indices along with anticipated interest rate cuts by the US Federal Reserve led to enhanced flow from foreign investors into the Indian bond markets, Morningstar's Srivastava said.

Apart from the index inclusion, other key drivers include India's improving fiscal position where deficit reduced from 5.1 per cent to 4.9 per cent further expected to decline to 4.5 per cent next year plus a healthy forex reserves, Singh said.

Moreover, FPIs inflow into the debt market are anticipated to grow as Bloomberg is including Indian government bonds to its emerging market index by January 2025. Additionally, interest from various foreign pension funds in Indian government bonds is likely to create more inflows into the indian debt market, Anand Rathi Wealth's Azeez said.

Prior to 2023, FPIs had consistently pulled out funds, withdrawing Rs 15,910 crore in 2022, Rs 10,359 crore in 2021, and a record Rs 1.05 lakh crore in 2020.

On the equity front, the financial services sector experienced the largest outflows, totalling Rs 54, 500 crore, followed by the oil & gas sector with Rs 50,000 crore, and fast-moving consumer goods (FMCG) with Rs 20,000 crore.

FPIs began 2024 on a weak footing, withdrawing Rs 25,700 crore in January amid a spike in US bond yields and uncertainty surrounding the global and domestic interest rate environment.

However, this trend reversed in February and March, as FPIs invested Rs 36,600 crore, encouraged by India's strong economic growth, market resilience, and easing US bond yields.

The recovery was short-lived, as FPIs turned net sellers in April, a trend that persisted into May, driven by political uncertainty during the general elections.

Despite this, FPIs returned to equities in June and sustained their buying momentum until September, culminating in a net investment of Rs 57,359 crore in September alone, buoyed by a rate cut from the US Federal Reserve.

October and November, however, marked a sharp reversal, with FPIs pulling out a massive Rs 1.16 lakh crore collectively. October saw an unprecedented outflow of Rs 94,017 crore -- the largest monthly withdrawal on record -- amid increased allocations to China, concerns over muted corporate earnings, and the high valuation of Indian equities.

Despite the volatility, FPIs have shown signs of revival in December, with net inflows exceeding Rs 20,071 crore so far, signaling renewed interest in Indian equities.