2023 in Review: FPI inflows recorded at ₹1.65 lakh crore, highest since 2020; will the trend continue?

After outflows worth ₹1.21 lakh crore in 2022, foreign portfolio investors (FPIs) returned as buyers in 2023, buying Indian equities worth ₹1.65 lakh crore. This was the highest FPI inflow since 2020 when buying stood at ₹1.7 lakh crore.

This came on the back of improving macros, markets on a record-high streak, declining inflation, hopes of a rate cut in 2024, and the possibility of the incumbent government returning for a third term in the general elections next year.

In 2023, the Indian stock market began with a downtrend but rebounded strongly later in the year. The Nifty index recorded a notable year-to-date return of +18%. Mid and small-cap stocks surpassed expectations, delivering impressive returns of +40% and +50%, respectively. The market saw the introduction of 57 mainboard IPOs. Specific sectors, such as defence, realty, autos, public sector enterprises (PSEs), and pharmaceuticals, emerged as major performers. However, new-age businesses presented a mixed picture in terms of performance during this period.

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On the economic front, India achieved the status of the fifth-largest global economy and maintained its position as the fastest-growing, despite concerns about economic downturns in other developed nations. The Reserve Bank of India implemented a repo rate increase to 6.5% in February but later adopted a pause to balance between addressing inflationary pressures and sustaining growth rates. The Israel-Hamas war, though unexpected, did not disrupt the overall upward trend in the market. Recent state assembly elections hinted at the possibility of a third term for the current Modi government in the upcoming general elections, as perceived by the market.

Exiting 2023 on a positive note, the RBI increased its FY24 GDP guidance by 50 basis points to 7%, and the US Fed indicated at least three rate cuts in 2024.

FPI trend

During the year, FPIs were net sellers in just 4 months and buyers in the remaining 8.

The year started on a negative note with the FPIs selling Indian equities worth ₹28,852 crore in January and ₹5,294 crore in February. Post that FPIs remained buyers for 6 straight months between March and August, recording inflows worth ₹1.69 lakh crore in this period.

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FPIs infused 12,262 crore in August. Meanwhile, the net inflow was at ₹46,618 crore in July, ₹47,148 crore in June, and ₹43,838 crore in May. Before that, ₹11,631 crore was infused in Indian equities in April and ₹7,935 crore in March, data with the depositories showed.

Then in September, FPIs again turned net sellers, posting outflows worth ₹14,768 crore on the back of a rise in US bond yields and higher crude oil prices. They continued their selling spree, further withdrawing ₹24,548 crore in October.

Finally, in the second last month of the year, the FPIs turned positive again, recording inflows worth ₹9,001 crore and finally ended the year on a strong note with inflows worth ₹60,478 crore in December.

The steady decline in US bond yields has caused this sudden change in the strategy of FPIs after October. Since 2024 is expected to witness further declines in US interest rates, FPIs are likely to increase their purchases in 2024 too, believe experts.

Read here: 2023 in Review: Top 10 trends that caught investors' attention this year

Debt market

The calendar year 2023 is the first time in 4 years that FPIs have become net buyers of Indian debt with inflows worth ₹67,786 crore. Before this, FPIs were net buyers of Indian debt in 2019, when they invested ₹24,058 crore into bonds.

FPI infused funds worth ₹17,425 crore in December, positive for the 9th straight month since April. The debt markets witnessed FPI outflows in just 1 month in 2023 - March (worth ₹2,505 crore). Meanwhile, in January and February, FPIs invested ₹3,531 crore and ₹2,436 crore, respectively.

Overall, including equities as well as bonds, FPI inflows stand at ₹2.3 lakh crore.

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In terms of sectors, FPIs were big buyers in the financial services space. They also bought in sectors like autos, capital goods, and telecom. However, IT stocks have been sold the most by FPIs this year amid recession fears.

Going ahead, experts believe FPIs are likely to remain net buyers in Indian equities, especially awaiting the 2024 general election outcome.

Will this FPI trend continue next year? Here's what experts say:

Neeraj Chadawar, Head - Fundamental and Quantitative Research, Axis Securities

We believe the Indian equity market will continue to trade at a higher premium to EM in the next year, which will be further supported by the following - strong earnings outlook, the banking sector in better shape, and encouraging private capex cycle expectations.

Our benchmark indices have reached all-time highs, and the FTSE India is currently trading at a PE premium of 82% to the EM index (PE) vs. an average premium of 41%. It is noteworthy that at a similar time during the last year, India was trading at a 110% PE premium. While the Indian market is again at an all-time high, the PE premium this time around is only 82%, indicating that the market, on a relative basis, is not as expensive as it was last year. We believe these favourable valuations will continue to attract inflows in the future.

Read here: See Nifty at 25,000 level by 2024-end, says Rishi Kohli of InCred

Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities

It seems that the US interest has topped out and US 10 year bond yields which represent the cost of capital for corporates and consumers across the globe are already on their way down. This is good news for equity investors. First, bonds compete directly with equities. Falling yields mean equities become more attractive compared to bonds. Second, falling yields lead to lowering the cost of capital for corporations and consumers. This leads to an increase in the profitability of the corporate sector and more liquidity in the hands of consumers. These factors will lead to positive fund flows from FPIs in India in the year 2024.

Jyoti Roy, Head of Equity Research at Sanctum Wealth

With the US Fed pivoting in its last meeting, we have witnessed strong FII flows that have pumped in over ₹60k crore in Indian equities so far in December. Results of the recent state elections have been better than expected and the BJP's surprise victories in Rajasthan and Chhattisgarh have also added to the positive undertone. Moreover, the outcome of the state elections is being taken as a harbinger for the upcoming 2024 general elections with markets building in the continuity of the incumbent government.

At current levels, Nifty is trading at P/E multiples of 21x one-year forward EPS estimate which is slightly higher than the last ten one-year average of 20.5x. This indicates that while markets are not cheap, they are not expensive either and we can expect 8-12% upsides for the markets over the next one year given earnings growth expectations of 13-15% for FY2025e. Given reasonable valuations, stable earnings growth and a high probability of a favorable outcome of the general elections, we believe that India will be an attractive destination for FIIs in 2024.

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Trivesh D, COO, Tradejini

When it comes to India, I don’t think there is any foreign investor who does not want to invest in India. China's recent performance has cooled investor’s enthusiasm, leading them to shift their focus towards India as they are looking for riskier bets but with higher expected returns and political and demographic certainty.

There are many positive factors ahead for considering FII in India. The US Federal Bank’s shift from rate hikes to potential cuts in 2024 could make emerging markets like India more attractive for dollar-denominated investments. Also with falling US bond yields, which were once up, arbitrage opportunities for dollar carry trades have emerged, attracting FII inflows.

Not to forget the recent state elections, where we saw the market respond positively to the BJP's big wins. Similarly, India could fuel FII interest due to the stable political conditions following the general elections in 2024, which could boost investor confidence. Some experts believe FIIs who missed out on recent gains might plan to increase their investments.

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FIIs might prefer specific sectors

"India is receiving a new wave of investment. At the current level, I feel FIIs might prefer specific sectors like infrastructure, IT, and consumer staples depending on their risk appetite and growth expectations. FIIs prefer established players with strong and healthy track records. They keenly observe targeted sectors such as energy, pharmaceuticals, power, thermal energy, and hydropower. Apart from this, as we look forward to 2024, FIIs might also find opportunities in the Public Sector Undertakings (PSU)," said Trivesh D of Tradejini.

He further added that global investors are betting big on India's manufacturing sector. It's been happening since 2021. India's manufacturing sector experienced remarkable growth, with FDI hitting $17.51 billion. All thanks to the government's "Make in India" initiative. Overall, the outlook for the Indian stock market in 2024 appears cautiously optimistic, with FIIs playing a significant but not exclusive role. A confluence of favorable domestic and global factors could propel the market upward, noted the expert.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.