Equity market gets Rs 1,600 crore FPI inflows, down 99% from last year

According to the National Securities Depository Limited (NSDL) data, FPIs injected Rs 1,656 crore on a net basis into the Indian equity market this year (until December 27). Foreign investors were majorly selling in the stock market while buying in the primary market.

In contrast to equities, FPIs net bought Rs 1.12 lakh crore of domestic debt in 2024, up from Rs 68,663 crore in 2023. Inflows in the debt voluntary retention route (VRR) and fully accessible route (FAR) categories were Rs 13,782 crore and Rs 28,795 crore in 2024, respectively, the NSDL data showed.

“The larger picture in 2024 from a global investor’s point of view was that the US market was doing well and the US dollar remained strong. Post Donald Trump’s election, the view was that the dollar would remain a stronger currency and the US market would be a good investment destination. It was the biggest factor driving the global flows. When the largest market appears favorable, every other asset class has to offer something better. That was a big challenge for other (emerging) markets (including India) in 2024,” said Nitin Jain, CEO, Kotak Mahindra Asset Management, Singapore.

Despite the inclusion of a couple of India stocks into MSCI’s emerging market indices, foreign investors stayed away from the Indian market. MSCI indexes are globally tracked by investors who allocate funds based on the weightage given to countries and stocks.

The year began with FPIs buying Indian equities, purchasing Rs 1.12 lakh crore of domestic shares in the first nine months.

“This (inclusion in MSCI indices) would have meant passive flows coming into the Indian market. However, we haven’t seen flows. This means that investors were underweight on India,” Jain said.

On an aggregate level, foreign investors’ holding of Indian equities has reduced to around 17 per cent at present, from 21-22 per cent in 2020.

The year began with FPIs buying Indian equities, purchasing Rs 1.12 lakh crore of domestic shares in the first nine months. This upbeat sentiment was driven by robust GDP growth, strong corporate earnings and macroeconomic indicators like fiscal and current account deficits remaining under control.

“It was a Goldilocks scenario. But the situation reversed after the Q2 FY2025 corporate results. Nobody expected that the growth would be flat. That was an indication that the Q2 GDP growth would also come lower,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

During Q2 FY2025, non-financial firms reported a slower growth of 5 per cent year-on-year in net sales, as compared to 6.4 per cent in the previous quarter. The contraction in profit after tax (PAT) also deepened, falling by 2 per cent y-o-y in Q2, a sharper drop than the 0.4 per cent y-o-y decline seen in Q1, according to a CareEdge Ratings report.

In the July-September quarter of 2024, the real GDP growth slumped to a seven-quarter low of 5.4 per cent. Following the sub-optimal GDP growth in Q2 and disappointing corporate earnings, FPIs offloaded Rs 1.16 lakh crore worth of local shares in October and November, resulting in a nearly 6 per cent fall in the Sensex and Nifty during the period.

However, in December, FPIs turned purchaser of domestic shares, buying Rs 16,675.11 crore worth of equities on a net basis.

Selling in stock market, buying in primary market

A notable trend was seen in FPI investment into the equity market — while foreign investors were selling heavily in the stock market or cash market, they remained purchasers mainly in initial public offerings (IPOs). In the cash market (up to December 27), FPIs sold Rs 1.19 lakh crore while investing Rs 1.21 lakh crore through the primary market route, the data showed.

“The selling through exchanges was mainly due to the high valuations and investing through the primary market was mainly due to the fair valuations,” said Geojit’s Vijaykumar.

At the start of the year, India, within the emerging market, had the highest premium in terms of valuation, which was justified by strong earnings outlook and GDP growth. However, during the later part of the year, there were some events with not-so-best outcomes, such as below-expectation GDP growth in Q2, weak quarterly earnings and elevated inflation levels.

This indicated that the valuation premium which India enjoyed was not commensurate with economic news during the year. Due to this, foreign investors looked at booking profits in the secondary market, said Kotak Mahindra Asset Management’s Jain

“At the same time, there were new-age companies such as digital, renewables, electric vehicles, contract development and manufacturing organisation (CDMO), electronic manufacturing services (EMS), and food delivery and quick commerce in the primary market that caught the attention of foreign investors. Since there were some interesting companies, foreign investors were selling in the secondary market and buying in the primary market,” he said.

Purchase in the primary market includes buying through preferential allotment, rights issue, initial public offers and buyback of shares.

Outlook for 2025

Analysts see a turnaround in FPI flows into India in 2025 on the expectation of a recovery in GDP growth, pick-up in government spending, improvement in corporate earnings and ease in inflation. They also expect the RBI to cut interest rates in 2025.

“Everyone knows that India will be the best-performing market for the next 3, 5, 10 years. Therefore, FPIs cannot sell consistently. They will turn buyers in India when there are indications of growth and earnings recovery,” said Vijaykumar.

A recent RBI article said the country’s growth trajectory is poised to lift in the second half of 2024-25, driven mainly by resilient domestic private consumption demand. In addition to this, sustained government spending on infrastructure is expected to further stimulate economic activity and investment.

However, the headwinds for FPI flows into India in 2025 would be an appreciation of the US dollar and higher US 10-year bond yield, Vijaykumar added.