India experienced a drastic drop in Foreign Portfolio Investment (FPI) inflows in 2024, with net investments falling by 99 per cent compared to the previous year, according to data from the National Securities Depository Limited (NSDL). The data highlighted that net FPI inflows decreased from ₹1.71 lakh crore in 2023 to just ₹2,026 crore in 2024. The NSDL data underscores significant challenges for India in attracting foreign investment.
According to stock market experts, one of the primary reasons for this decline was the dominance of the US economy in global markets. The strong performance of the US economy, coupled with resilient stock markets and prolonged higher interest rates, redirected substantial investment towards US bonds, money markets, and equities.
This shift occurred at the expense of emerging markets like India. Additionally, Indian markets lost some appeal due to higher valuations, an elevated market cap-to-GDP ratio, slowing GDP growth, weaker industrial output, and reduced corporate earnings growth.
Ajay Bagga, a banking and market expert, said, "Many factors are behind the tempering of FPI flows in 2024 in India. The first was US exceptionalism. The strong US economy, US stock markets, and 'higher for longer' US interest rates meant that strong flows went into US money markets, US bonds, and the US stock market, to the detriment of emerging markets, including India."
Domestically, several factors further deterred FPI inflows. The general elections in 2024 led to a slowdown in government spending and public infrastructure projects, dampening economic activity. Meanwhile, the long-awaited stimulus in China caused a temporary inflow of USD 53 billion into Chinese stocks between 24th September and 8th October. This development diverted capital away from Indian equities during the same period.
"Another factor was the underperformance of Indian banks and non-bank lenders as the RBI tightened unsecured lending rules and liquidity conditions," added Bagga. The underperformance of Indian banks and non-bank financial institutions also played a significant role in this trend.
The Reserve Bank of India's tighter regulations on unsecured lending and reduced liquidity impacted these sectors, which hold considerable weight in the Indian markets. FPIs, traditionally overweight on financial stocks, net sold USD 35 billion worth of shares in the sector during the year.
Experts also noted that global factors, such as the Bank of Japan's monetary policy changes, further exacerbated the situation. Adjustments to interest rates affected the "yen carry trade," leading to outflows across emerging markets, including India.
Despite these challenges, FPIs maintained some interest in India's primary markets, indicating confidence in select long-term growth opportunities. Moreover, the rise of domestic investors provided a buffer for the markets, enabling FPIs to exit with minimal disruptions.
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