FPIs withdraw ₹11,000 crore from Indian equities post Budget 2024

Foreign investors have been net sellers since the Union Budget 2024, withdrawing nearly ₹11,000 crore in the last three trading sessions, according to Trendlyne data. However, the market impact has been limited as retail investors, through mutual funds, have been buying the dips.

The government in the budget raised the long-term capital gains tax to 12.5% and the short-term capital gains tax to 20%, which experts believe has negatively impacted FPI sentiment. The impact of the tax changes went beyond equities, as the rupee fell to record lows.

Analysts had previously indicated that any increase in capital gains tax would be a negative factor for the market. Despite this, retail investors seem to be disregarding the tax hike and continuing to purchase stocks sold by foreign investors.

While FPIs have remained net sellers' post budget, domestic institutional investors (DIIs) have bought ₹8,105 crore worth of stocks, mitigating the market downturn. FPIs bought equities worth a net amount of ₹18,409 crore in six sessions before the presentation on Tuesday.

Commenting on the recent market developments, Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said, "The unique feature of the ongoing bull market in India is its ability to climb all walls of worry. The market dismissed all concerns relating to elections, the budget, and the correction in the mother market US."

He noted that the buy-on-dips strategy, which has been effective during this rally, remains valid. However, there is a valuation discrepancy: large-cap stocks are fairly valued, while mid- and small-cap stocks are overvalued. He advised long-term investors to take advantage of this discrepancy by purchasing quality large-cap stocks during market declines.

"FPIs have again turned sellers, and this might put further pressure on large caps even though the FPI selling is being matched by DII buying. The US Q2 GDP numbers coming in better than expected at 2.8% further reinforce the soft landing hope for the US economy," he added.

In June, FPIs invested ₹26,565 crore in equities, driven by political stability and the sharp rebound in markets. Before that, FPIs withdrew ₹25,586 crore in May on poll jitters and over ₹8,700 crore in April on concerns over a tweak in India's tax treaty with Mauritius and a sustained rise in US bond yields.

Meanwhile, the robust participation of retail investors has provided a solid foundation for the Indian market, serving as a buffer against the impact of foreign portfolio investor (FPI) selling.

According to the Economic Survey 2023–24, the number of retail investors in the domestic stock market has surged to over 9.5 crore. They directly hold nearly 10% of the market through investments in 2,500 listed companies.

As of March 2024, this translates to approximately ₹36 lakh crore in wealth. Additionally, retail investors have significant indirect ownership through equity mutual funds, which collectively manage assets worth ₹28 lakh crore.

The robust participation of retail investors has been the main driver behind the unprecedented rally in Indian frontline indices in recent years.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.