FPI inflows poised to surge after a modest H1 2024; June sees strong recovery

After a strong 2023, foreign portfolio investor (FPI) inflows into Indian equities were relatively modest in the first half of 2024, amounting to ₹3,201 crore. This follows a substantial inflow of over ₹17,000 crore in the previous year.

Despite the market's bullish trend and multiple new highs, FPIs remained cautious due to uncertainty surrounding the Lok Sabha elections, high valuations, the outperformance of Chinese markets, hawkish stances from central banks, and other global cues.

However, once concerns about the new government settled, FPIs returned as buyers in June after two months of selling. In June, FPIs purchased Indian equities worth ₹26,565 crore, marking the second-highest buying spree of 2024. The highest was in March, with ₹35,098 crore in inflows.

June's buying activity turned FPIs into net buyers for the year. Before June, FPIs had sold Indian equities worth ₹25,586 crore in May and ₹8,671 crore in April. The start of the year saw significant selling, with ₹25,744 crore in January, followed by modest inflows of ₹1,539 crore in February.

However, experts believe that FPI inflows are projected to increase going forward. A key driver of this trend is the inclusion of Indian government bonds in the JP Morgan Global Bond Indices, effective June 28, 2024. This inclusion is expected to attract approximately $25-30 billion over a 10-month period, significantly boosting inflows into India's debt market. Another trigger for increased FPI investments is the anticipated rate cut in the US. Currently, one rate cut is expected by the third or early fourth quarter of the calendar year (October-December quarter). This potential monetary easing could enhance the attractiveness of emerging markets, including India, for foreign investors.

"FPI’s investment of ₹26565 crores in equity in June marks a reversal of their strategy of selling in the two preceding months. Political stability despite the BJP not getting a majority on its own, and the sharp rebound in markets aided by steady DII buying and aggressive retail buying, has forced the FPIs to turn buyers in India. It appears that FPIs have realized that selling in the most-performing market would be a wrong strategy. FPI buying can be sustained provided there is no sharp upmove in U.S. bond yields.

India’s inclusion in the JP Morgan Bond Index is certainly positive. The debt inflows for 2024 so far stand at ₹68674 crores. In the long term, this will reduce the cost of borrowing for the government and reduce the cost of capital for corporates. This is positive for the economy and therefore for the equity market," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Vijayakumar added that the first fortnight of data in June from the NSDL shows FPI buying in realty, telecom and financials. FPIs were sellers in IT, metals and oil and gas. The FPIs are likely to continue the buying trend in financials.

Experts from various financial institutions highlight the factors influencing FPI behavior and predict a strong second half for 2024. As India's economic fundamentals remain solid and political stability is assured, FPIs are poised to increase their investments, further boosting the market's momentum.

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

If you look at FPI’s fund flow data from Sebi then you will see that they have been buyers in the last 12 sessions from 10 to 26 June. They have pumped in nearly ₹32,087 crore in Indian equity markets.

FPIs pump money into emerging markets based on certain set criteria. These are the growth in the domestic economy, the rate of inflation and the performance of the domestic corporate sector and domestic currency. Besides, these, the most important factor is US interest rates.

In the case of India, it is expected to remain the fastest growing economy for many more years to come. Domestic inflation is moderate, currency (INR) is almost stable and the performance of India’s corporate sector has remained consistent so far. If there’s any change in this equilibrium, coupled with a change in the US interest rates in the second half of the calendar, we may see fund flows from the FPIs getting impacted.

Tanvi Kanchan, Head - UAE Business & Strategy, Anand Rathi Shares and Stock Brokers

FPI inflows in the first half included net sales of ₹25,744 crore in January but rebounded with inflows worth ₹31,056 crore in March. The outlook for July- December is optimistic due to economic growth prospects, potential rate cuts, and positive sentiment.

Foreign Portfolio Investment (FPI) inflows are projected to increase significantly in June 2024. The inclusion of Indian government bonds in the JP Morgan Global Bond Indices, effective June 28, 2024, is expected to be a major driver of this trend. This inclusion is anticipated to bring in approximately $25-30 billion over a 10-month period, significantly boosting inflows into India's debt market.

This move will see Indian government bonds being gradually added to the indices, starting with a 1% weight per month until it reaches a maximum of 10%. Additionally, MSCI's decision to raise India's weightage in its indices to an all-time high of 18.2% has further attracted FPI interest. This adjustment is expected to bring up to $1.2 billion in passive foreign flows following the review in February 2024.

Overall, these developments indicate a strong positive outlook for FPI inflows into India, driven by improved macroeconomic conditions, regulatory changes, and significant index inclusions. This influx is expected to support both the equity and debt markets, enhancing stability and growth prospects for the Indian economy.

Trivesh D, COO at Tradejini

Typically, during the election season, FIIs prefer to stay from the Indian markets given the volatility and ambiguity surrounding the election results. But given that the political turmoil has reasonably settled down, I feel that the FII inflows may see some uptick, coupled with the fact that India is one of the fastest-growing economies with a strong bull run evidenced in the last 30 months. The potential for growth in India is exceptionally high compared to other markets.

Ravi Singh- SVP, Retail Research, Religare Broking Ltd.

After the elections, foreign investors have been buying a lot in the Indian markets because the Modi government stayed in power. We believe that this trend will continue as FPI are confident that there will be policy continuation and favorable economic policies that will drive further growth.

Anirudh Garg, Partner and Fund Manager at Invasset

Foreign Portfolio Investors (FPIs) have been net sellers in the cash market for many months. However, this trend might reverse, and we could see them turning into buyers due to several factors. Firstly, India's economic outlook remains positive, with projected GDP growth and stable macroeconomic conditions attracting foreign investment. Secondly, the structural reforms and favorable policies implemented by the government enhance India's attractiveness as an investment destination.

Global economic conditions, such as the stabilization of oil prices and easing inflation, also play a role in potentially reversing the FPI outflows. Additionally, as developed markets face growth challenges, emerging markets like India offer attractive investment opportunities due to their higher growth potential and expanding consumer base.

India's demographic advantages, such as a young population and increasing urbanization, further support the long-term investment case. These factors, coupled with ongoing infrastructure development and economic reforms, are likely to encourage FPIs to return to the Indian market as buyers.

Atul Parakh CEO of Bigul

FPI inflows are showing tentative signs of recovery due to political stability but remain dependent on global markets, Q1 earnings, and upcoming budget announcements. A potential US rate cut in Q3 could further incentivise FPI inflows to emerging markets like India, with pre-Diwali or Diwali timeframe being a possibility. Experts warn that near-term FPI flows might be volatile, and while concentrated buying in select stocks exists, high valuations could limit broader participation. The consistent flow of mutual fund investments, particularly SIPs, might sustain mid/small cap outperformance despite stretched valuations, but long-term caution is advised. Closely monitoring both domestic and global cues is essential for navigating the future of mid/small cap performance and FPI flows.

Mohit Khanna, Fund Manager at Purnartha One Strategies

While on one hand, FPIs have been major sellers of Indian equities before June, the country’s forward GDP growth estimates have received constant upgrades. Among the major economies in the World, India continues to offer the fastest growth rates. In that sense, it's difficult for FPIs to ignore India for a sustained period.

If we look at the composition of India's GDP growth over the last couple of years, we see that the Government’s infrastructure spending has taken a larger share of the pie. Therefore, I reckon that as the FPIs gain more clarity on the Government’s spending program (upcoming Budget in July 2024) they will take a course correction of their bets on India accordingly.

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 decisions.