Foreign Portfolio Investors (FPIs) are returning to the Indian stock market on a large scale in August, investing ₹16,621 crore in Indian stocks during the first 15 days of the month. This is after foreign investors invested ₹20,200 crore in Indian equities in July and have thus brought their total investments in the past six weeks to around ₹36,800 crore.
The new buying interest is seen as a positive signal for Indian markets as foreign investors went through an extended period of heavy selling earlier this year.
Although the influence of FPIs on the Indian stock market has reduced slightly because of the increasing interest of domestic institutional and retail investors, foreign flows are still important for market sentiment, liquidity, and investor confidence.
Six weeks of foreign buying
The results show a clear change in FPI behaviour.
Foreign investors invested ₹20,200 crore in July and another ₹16,621 crore during the first half of August. In total, the inflows amount to about ₹36,800 crore in six weeks.
The buying is a far cry from the selling pressure that was seen in March and June.
In those four months, FPIs withdrew substantial amounts from Indian equities:
March: ₹1.17 lakh crore
April: ₹60,847 crore
May: ₹32,963 crore
June: ₹49,340 crore
The cumulative withdrawal in the March-June period was approximately ₹2.60 lakh crore.
Despite the recent return of foreign investors, FPIs are still net sellers in Indian equities for the year so far. The magnitude of their withdrawals during 2023 has also exceeded the amount withdrawn during the whole previous year, according to the figures cited in the report.
Why do FPIs come back?
Market experts have attributed such new buying to a multitude of reasons.
The main reason is the improvement in valuations. Some of the Indian stocks and sectors have become somewhat more attractive to overseas investors since the earlier correction and selling pressure.
One other factor that is really important is the performance of Indian companies during the April-June quarter of FY27. The strong corporate performance in the last quarter of the year has also helped in increasing confidence in the health of the Indian economy and the corporate sector.
The expectation of a less hawkish US interest rate cut also helped to lift investor confidence globally. Investors may also shift money away from the US monetary policy and towards emerging markets and risk assets like Indian stocks.
Crude oil prices provide relief
Lower crude oil prices have also helped to lift sentiment.
Investors were worried about crude prices rising above $110-per-barrel prices earlier this week as geopolitical tensions and the energy crisis linked to the West Asia conflict were causing concern among investors.
A further decline in crude prices has reduced some pressure on oil-importing economies such as India.
Lower crude prices may help India in reducing its import bill and easing inflation and current account pressures.
What does FPI buying signal?
For the Indian market expert Vedant Gupte, co-founder and CEO of Track, the return of FPI buying in August is an important message for Indian investors.
The recent buying could suggest that the heavy selling between March and June was largely driven by global economic conditions rather than a fundamental deterioration in the Indian economy.
If this interpretation is true, the improvement in global financial conditions could also encourage foreign investors to invest in Indian stocks.
But FPI flows are still highly sensitive to international developments, so this trend could change if global economic conditions deteriorate.
Will foreign investment ever come back?
The sustainability of FPI inflows will be closely monitored in the coming months.
Several global indicators could influence foreign investors’ decisions, including US Treasury yields, the US dollar index, crude oil prices, and corporate earnings expectations.
A strong increase in US bond yields could make American assets more attractive and maybe divert funds away from emerging markets. A stronger dollar may also limit foreign investment flows into emerging economies.
Crude oil prices will also remain important for India because higher energy costs can affect inflation, corporate margins, and the country’s external balance.
FPIs also invest in Indian debt markets
Foreign investors have not limited their interest to equities. They have also continued to invest in India’s debt and bond markets.
During this period, FPIs invested ₹972 crore through the Fully Accessible Route (FAR) and another ₹69 crore through the normal route.
The interest in Indian debt securities shows that investors from other countries are interested in the global financial market and all of the other sectors in Indian markets.
Outlook for Indian markets
The return of foreign investors comes at a time when Indian markets are also supported by strong domestic participation. Domestic institutional investors and retail investors have increasingly played a more important role in supporting equity valuations.
However, sustained FPI flows to the market could be an additional asset to market liquidity and sentiment.
For now, the ₹36,800 crore investment over six weeks is a turnaround from the aggressive selling seen earlier in the year. How this trend develops into a sustained phase of foreign buying will depend largely on global monetary policy, oil prices, currency movements, and the earnings trajectory of Indian companies.
So investors will be closely watching FPI flow data in the coming weeks to see if the August buying momentum can continue.
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