FPIs back to buying Indian equities? Data from last week indicates so

Foreign investors have paused their relentless selling over the election outcome, turning net buyers of shares worth ₹11,730 crore last week (June 10-15), according to NSDL data. This shift marks a sharp contrast to the intense selling seen in the last couple of months. In April, foreign investors were net sellers of ₹8,671 crore worth of equities, which increased to ₹25,586 crore in May.

The influx of foreign funds amid renewed buying indicates growing confidence in the Indian market. This confidence is buoyed by improving macroeconomic indicators and positive policy expectations. The foreign investments have provided a significant boost to already expensive markets, injecting liquidity and potentially fueling further gains in the equity markets.

Indian markets experienced a sharp decline of nearly 6 percent on June 4 due to the 2024 Lok Sabha election results, which were tighter than expected, coupled with the BJP's performance not meeting exit poll predictions. However, following confirmation of the Modi-led NDA forming the new government, the markets swiftly rebounded, registering a significant recovery of over 4 percent in June thus far.

Similarly, ahead of the elections, Foreign Portfolio Investors (FPIs) were largely selling off their holdings amid concerns that the BJP might secure fewer seats compared to 2019. Additionally, global factors such as the outperformance of Chinese markets, a hawkish stance from central banks worldwide, and other global economic cues weighed on foreign investors' sentiments towards Indian equities.

However, signs of policy continuity under NDA 3.0 were pivotal in reassuring FPIs. The recent uptick in buying activity reflects clarity on the political front, with the BJP-led NDA returning to power and pledging to maintain key policies. Prime Minister Narendra Modi's third consecutive term and the retention of key ministers have solidified policy stability, prompting foreign investors to regain confidence in Indian equities and resume buying.

Despite the recent recovery and reassurances of policy continuity under the BJP-led NDA government, FPIs have been net sellers in Indian equities in June. They sold equities worth ₹3,064 crore overall this month, with significant outflows amounting to ₹14,794 crore in the first week alone.

"After the roller coaster ride in the market in the first week of June, stability has returned to the market as indicated by the sharp fall in India VIX from 27 on June 4 to 12.82 on June 14. This fall in India VIX indicates the return of stability and a likely consolidation phase in the market. The resilience of the market and eagerness of retail investors to buy every dip in the market will force FPIs to reduce their selling which was sustained in May. However, if the market continues to rally from here, FPIs may again turn sellers in India and buyers in other markets like Hong Kong which are very cheap compared to India," said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

In the current calendar year, FPIs have sold shares worth ₹26,428 crore. Only two months, February and March, witnessed net buying from FPIs. They bought equities worth ₹1,539 crore in February and ₹35,098 crore in March, while the other months have seen continuous selling pressure.

Most experts believe that the future buying activity of foreign portfolio investors in Indian equities hinges significantly on upcoming policy announcements and India's attractiveness relative to other emerging markets. Policy stability and reforms that support economic growth are crucial factors that can sway investor sentiment positively.

Additionally, India's demographic dividend, robust consumption potential, and ongoing structural reforms aimed at improving ease of doing business and infrastructure development play pivotal roles in enhancing its appeal among global investors. Moreover, geopolitical stability and currency movements also influence FPIs' investment decisions in Indian markets.

Meanwhile, foreign investors are increasingly favoring India's debt market over equities. As of mid-June, FIIs have allocated ₹5,700 crore to the debt market. This shift is largely attributed to India's inclusion in the global bond index, a move that has bolstered foreign interest in Indian debt securities. Despite withdrawing ₹26,428 crore from the equity market in 2024, FIIs have poured ₹59,373 crore into debt instruments, highlighting their growing confidence in the stability and returns offered by India's fixed-income securities.

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