Foreign portfolio investors (FPIs) have returned to Indian equities after a long selling streak that lasted 36 sessions. The recent surge in FPI activity has brought in more than ₹10,000 crore over two consecutive days, signaling a potential shift in market sentiment.
While this development is welcomed by market observers, experts advise caution and stress that it is too early to predict whether this marks the beginning of a sustained inflow of foreign capital.
The rebound in FPI investments came on November 25, 2024, when foreign investors turned net buyers once again. The momentum continued on November 26, further strengthening the positive trend.
Several factors are believed to have contributed to this shift. Notably, the landslide victory of the BJP-led NDA in Maharashtra and the ceasefire agreement in the Middle East provided a sense of political and geopolitical stability, which may have encouraged the return of foreign investors to Indian equities.
One of the main catalysts for this surge was the MSCI index reshuffle, which saw Indian stocks such as Voltas, Oberoi Realty, BSE, Kalyan Jewellers, and Alkem Laboratories being added to the prestigious MSCI Global Standard Index.
This inclusion prompted passive inflows of foreign capital. Furthermore, MSCI made adjustments to the Foreign Inclusion Factor (FIF) of HDFC Bank, increasing it from 0.56 to 0.74, which further drove investments into the stock.
According to analysts, the MSCI rebalancing alone is estimated to have attracted around $2.5 billion (approximately ₹20,000 crore) of the inflows, highlighting that the return of FPIs has been more targeted than broad-based.
However, this positive shift comes after two months of heavy FPI selling, which saw cumulative net outflows exceeding ₹1.09 lakh crore in October and November. Several factors were responsible for this mass exodus of foreign capital.
A significant driver of the outflows was China’s economic stimulus package, announced in late September 2024, which shifted investor focus from Indian markets to Chinese assets.
In addition, rising geopolitical tensions, particularly in the Middle East, and global uncertainties around the US presidential election added to the risk-off sentiment in the markets.
Moreover, concerns about domestic issues in India, particularly the slowdown in consumption, further dampened foreign investors' appetite. The result was a significant correction in India’s benchmark indices, including the Sensex and Nifty 50, which saw declines of around 11 percent from their September peaks, briefly entering bearish territory.
Despite the recent positive flows, experts urge caution in interpreting the return of FPIs as a signal of a sustained rebound in foreign investments. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, believes that the FPI selling in India is likely to slow down.
With the China trade nearing its end and US valuations hitting a peak, the trend of FPI outflows from India is expected to taper off. Vijayakumar points out that valuations for Indian large-cap stocks have moderated, and FPIs have resumed buying IT stocks, which has helped maintain resilience in that sector. Additionally, the banking sector has remained stable, largely due to strong domestic institutional buying.
Divam Sharma, Founder and Fund Manager at Green Portfolio PMS, also highlights that geopolitical tensions, China’s economic stimulus, and uncertainty surrounding the US election were major drivers of FPI outflows.
However, with the re-election of Donald Trump as US President, Sharma expects clarity in policy-making by early 2025. He predicts that as Trump's administration announces its policies in the first quarter of 2025, FPI confidence in emerging markets like India could be restored.
FPI flows are closely tied to global risk sentiment and liquidity, according to Abhijit Bhave, Managing Director and CEO of Equirus Wealth. Bhave notes that the recent outflows were largely driven by profit-booking and a strong US dollar.
However, as the Federal Reserve nears the end of its rate-hiking cycle and global liquidity improves, he anticipates a stabilization in FPI flows.
Bhave also points out that Indian equities have one of the lowest FPI ownership rates among emerging markets, currently at 17 percent, making the country an attractive destination for foreign investments in the long run.
Additionally, India’s structural growth drivers and potential benefits from Trump’s trade policies could further boost investor interest.
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