Foreign Portfolio Investors Shift Focus Amid Market Uncertainties
May has seen significant activity from Foreign Portfolio Investors (FPIs) in the Indian equity market, with sales reaching Rs 28,242 crore ($3.38 billion), marking the largest sell-off since January 2023. This trend reflects a strategic shift as FPIs reassess their positions in the wake of various global and local factors.
The Numbers Behind the Sell-Off
According to data from the National Securities Depository Ltd (NSDL), FPIs sold Rs 26,020 crore worth of Indian equities up to May 17 in the current calendar year. Comparatively, last January witnessed an even larger offload of Rs 28,852 crore. In the cash market specifically, foreign investors sold Rs 35,532 crore through May 17, while Domestic Institutional Investors (DIIs) counterbalanced this with purchases amounting to Rs 33,973 crore.
Factors Driving the Sell-Off
Several key factors are influencing FPIs’ decisions. Firstly, the ongoing general elections in India have introduced a level of uncertainty that makes the market less attractive in the short term. Additionally, FPIs are diverting funds to the Chinese market, where valuations are perceived as more favorable.
“The main trigger for the FII selling has been the outperformance of the Hong Kong index Hang Seng, which surged by 19.33% over the last month. FIIs are moving money from expensive markets like India to cheaper markets like Hong Kong, where the PE ratio is around 10 compared to India’s 20,” explains V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Market Volatility and Election Uncertainty
The election period has led to increased volatility in the Indian market. This is evident from the recent rise in India VIX, a volatility index, which has crossed the 21-mark. Such levels indicate a high degree of market uncertainty.
“This shift in FPIs’ behavior is not a random occurrence. It is a direct response to the ongoing geopolitical crisis in the Middle East, relative valuation discomfort, and the strength of US bond yields,” notes Vipul Bhowar, Director of Listed Investments at Waterfield Advisors.
Future Outlook
Despite the current sell-off, there is a silver lining. Vijayakumar suggests that the outcome of the general elections could significantly alter FPI equity flows. “Political stability will attract huge inflows,” he asserts, highlighting the potential for a positive turnaround if the elections result in a favorable and stable political climate.
FPI Activity in the Debt Market
On a brighter note, FPIs have been active buyers in the Indian debt market. So far in 2024, they have net bought Rs 45,087 crore and an additional Rs 7,040 crore through the debt-VRR (Voluntary Retention Route), according to NSDL data.
In conclusion, while May has seen a notable exit of FPIs from the Indian equity market due to a confluence of factors, including election uncertainties and attractive valuations elsewhere, the long-term outlook remains tied to political outcomes and broader economic conditions. The debt market, however, continues to attract FPI interest, indicating a nuanced approach to investment in India.
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