FPI outflows reach ₹17,404 crore in August so far; volatility expected to continue

After a robust performance in June and July, foreign portfolio investor (FPI) have turned net sellers of Indian equities in August. As of August 13, FPI outflows amounted to ₹17,404 crore, a sharp contrast from the substantial inflows worth ₹58,930 crore recorded over the previous two months.

The strong FPI outflows in August coincides with a noticeable drop in the Indian equity markets. Indian equities have experienced a more than 3 percent decline, driven by global economic uncertainties and high domestic valuations.

"The market performance was impacted by a confluence of global factors, such as 1) a sharper-than-expected weakening of the US labor markets, 2) a sharp appreciation of USD-JPY, resulting in the unwinding of Yen carry trades globally, and 3) an increase in geo-political tensions in the Middle East. On the economy front, the RBI kept rates unchanged while broadly retaining its FY2025 growth (7.2%) and CPI inflation (4.5%) projections," explained Shrikant Chouhan, Head of Equity Research, Kotak Securities.

The overall FPI outflows in Indian markets, which includes debt, hybrid, debt-VRR, and equities, stood at ₹7,227 crore as of mid-August, with debt market inflows at ₹8,040 crore.

Before August, FPIs bought equities worth ₹32,365 crore in July and ₹26,565 crore in June. However, they were also negative in the start of the current financial year 2024-25. The foreign investors sold Indian equities worth ₹25,586 crore in May and ₹8,671 crore in April.

Volatility over Lok Sabha elections, outperformance in Chinese markets, and other global cues had weighed on the sentiment of foreign investors earlier this financial year.

FPI inflows came in at ₹35,098 crore in March and ₹1,539 crore in February. However, in January, FPIs sold ₹25,744 crore worth Indian equities.

Overall in 2024 YTD, FPIs have been net buyers of equities worth ₹18,162 crore (as of August 13). The overall net investment, including all asset classes, has reached ₹1,31,375 crore, with debt markets alone attracting ₹99,028 crore so far in 2024.

Going ahead, most experts expect volatility in FPI flows as the Indian market valuations remain expensive.

Market experts are cautious about the future of FPI flows, noting that the high valuations of Indian stocks could lead to continued volatility. Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlighted that if Indian markets continue to rise, foreign institutional investors (FIIs) might increase their sales due to the elevated valuations, especially in comparison to other global markets.

"Going forward, if the market continues to rise, FIIs are likely to press more sales since Indian stock valuations continue to remain elevated, particularly in relation to valuations in other markets," said Vijayakumar.

Alok Agarwal, Head - Quant & Fund Manager, Alchemy Capital Management

Predicting FII flows remains challenging due to their sensitivity to global economic and geopolitical developments. However, there are reasons to be optimistic about a positive trend in the future. India's strong economic growth, coupled with its political stability and ongoing structural reforms, makes it an attractive destination for global investors. Moreover, the increasing integration of India into global supply chains and its strategic initiatives in digital transformation and infrastructure development are likely to draw sustained foreign investments. While short-term volatility in FII flows is expected, the long-term outlook remains positive.

FII holding in India is already at a 10-year low. India is a unique large country with stability in government along with double-digit economic growth, double-digit corporate earnings growth and double-digit corporate ROE. In my view, FIIs can’t remain out for a long period of time.

Sunil Damania, Chief Investment Officer, MojoPMS

Despite global negative news, the Indian stock market has demonstrated remarkable resilience. This resilience is attributed to the robust economic growth of India, effective monetary policy by the central bank, and record inflows from retail investors. Unlike previous trends, retail investors are now using market dips as opportunities to increase their equity allocations.

In typical scenarios, fund managers refrain from making significant cash calls on the market to avoid substantial underperformance. However, the strong inflows from retail investors are pressuring fund managers to invest in the equity market, leaving them with limited alternatives.

FPIs typically pursue valuations. Currently, India’s valuations are at a premium compared to the historical premiums of other emerging markets. It's worth noting that FPIs generally do not heavily invest in the Indian market for two consecutive years, as per historical patterns. Last year, the Indian market saw record inflows from FPIs, leading to expectations of muted inflows this year. The average monthly inflows from FPIs in 2024 were ₹15,000 crore, which has come down to ₹4,000 crore year-to-date in 2024.

While FPI inflows into Indian equities have slowed in August due to global economic uncertainties and high domestic valuations, market experts remain cautiously optimistic about the long-term outlook. India's strong economic fundamentals and resilience in the face of global challenges continue to make it an attractive destination for foreign investors. However, the potential for volatility in FPI flows persists, with high valuations and global market conditions playing a crucial role in shaping investor sentiment.

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.