FPIs RETURN : A SUSTAINABLE SHIFT OR TEMPORARY REPRIEVE FOR INDIAN MARKET

- By Siddharth Bhadoriya

The Indian stock market saw a dramatic turnaround as FPIs (Foreign Portfolio Investors) made a remarkable return to Indian equities after an extended selling streak that lasted 36 sessions. This comeback, marked by net purchases exceeding ₹10,000 crores over just two days, according to data from NSDL(National Securities Depository Limited) signals a potential turning point for investor sentiment in the Indian stock market.

CAUSES

The dramatic change in investor sentiment coincided with two important events -

1) Victory of the BJP-led NDA in Maharashtra election : Election result in the state of Maharashtra is expected to provide political stability, boosting investor confidence due to the continuity of pro-business policies, especially after uncertainty following previous coalition shifts. Furthermore, with a clear mandate, the government will likely push forward with infrastructure projects, urban development, and manufacturing sectors aligned with BJP policies.

2) Israel - Hezbollah Ceasefire : Israel and Hezbollah agreed to a historic ceasefire on 27th November after 14 months of hostilities. The de-escalation will ease some of the political tension in the market. This could clear supply chain bottlenecks and drive energy prices downwards, which in turn will encourage investor confidence and provide support to positive market sentiment.

The addition of five more Indian firms - Voltas, Oberoi Realty, BSE, Kalyan Jewellers, and Alkem Laboratories in MSCI (Morgan Stanley Capital Investment) global standard index also played a considerable role in foreign inflows in the stock market. MSCI also increased the Adjustment factor (A factor or formula used to adjust a data set or metric which reflects better measurement, new methodology, or changes to real world conditions) of HDFC Bank to 1.00 from 0.75 which led to an increase in its Foreign Inclusion Factor (The proportion of outstanding shares that are available for purchase in public equity markets by international investors) to 0.74 from 0.56

The increase in investment by FPIs, though substantial, followed a cumulative net outflows of more than ₹1.09 lakh crores across the months of October and November. This aggressive selling spree was due to -

1. A massive stimulus package worth $1.4 trillion announced by China in September to boost economic growth led to capital outflows from India.

2. Rising conflicts in the Middle East, Russia - Ukraine war and the uncertainty around the US presidential elections added to negative investor sentiments.

3. Slowdown in domestic consumption.

SUSTAINED COMEBACK BY FPIs?

The recent inflows by foreign investors is a positive signal, but it is too early to call it a sustained return by Foreign Portfolio Investors. The rebalancing of the MSCI global standard index was a major part of this capital inflow by foreign investors (approximately ₹20,000 crores). This underlines the fact that the influx of foreign capital in the Indian stock market was targeted and not a broad based return of foreign investors. Inflows of foreign capital is closely associated with investor sentiment, global market stability and dollar liquidity. While the Chinese economic stimulus, global conflicts and slowing domestic consumption drove out foreign capital, with Donald Trump as the president of the United States, his plans of low corporate taxes and higher import tariffs will lead to higher inflation, higher interest rates and a strong dollar which would entice FPIs to pull out some part of their money and invest in the US. On the other hand, FPI ownership in Indian equities is 17%, making it one of the lowest ownership rates among the emerging markets, making it an attractive investment for foreign capital.

CONCLUSION

FPIs have varied purposes in choosing to invest in India amidst global uncertainties in choosing to invest in India. Their primary motivation is the potential for higher returns on their investments. India, being a developing country offers growth prospects that are stronger than those of developed economies. Indias’ rapidly growing economy, supported by its large consumer base and strong GDP growth make it an appealing destination for foreign investors. High growth sectors like technology, financial services, consumer goods and pharmaceuticals have shown significant resilience and growth, thus seeking exposure to these sectors.

While FPI investments bring liquidity and capital to Indian markets, they are also highly sensitive to global and domestic conditions. This means that factors such as interest rate hikes by the U.S. Federal Reserve, changes in India’s macroeconomic environment, or shifts in risk sentiment can lead to significant volatility in FPI flows. For instance, if global economic uncertainty rises, FPIs may withdraw funds from emerging markets like India to seek safe-haven assets, which can impact market stability. Indias’  interest rates tend to be higher than those of developed nations, offering FPIs the opportunity to earn higher yields in Indian markets compared to other regions. This is particularly appealing in an environment where many developed markets have maintained historically low-interest rates. FPIs play a critical role in India’s financial ecosystem by providing liquidity and contributing to market depth. However, the volatility in FPI flows highlights the importance of a strong domestic investor base, which can help counterbalance these external flows and stabilize the market during periods of high FPI activity.