New Delhi, India – The trend of foreign portfolio investors (FPIs) withdrawing funds from Indian equities has intensified, with almost Rs 20,000 crore pulled out in just five recent trading sessions due to high valuations and renewed interest in China’s markets.
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Significant FPI Outflows in November
In the first five trading sessions of November (November 4-8), FPIs have withdrawn Rs 19,994 crore from Indian equity markets, adding to a net outflow of Rs 13,401 crore for the year.
This comes after a record-breaking Rs 94,017 crore outflow in October, marking it as the worst monthly outflow since March 2020, when FPIs pulled out Rs 61,973 crore during the early pandemic months.
The recent FPI exodus has largely been attributed to high stock valuations in India and shifting global investment dynamics.
Although FPIs were net buyers throughout much of 2024, they became net sellers in October due to rising interest rates and geopolitical shifts.
Key Reasons for the Exit: High Valuations and Chinese Opportunities
Analysts point to high valuations in Indian markets as a primary reason for foreign investors to seek alternatives, with China emerging as an attractive option.
Himanshu Srivastava, Associate Director at Morningstar India, highlighted that China’s low valuation, coupled with new stimulus measures to revive its economy, has caught the attention of FPIs.
These measures are designed to spur growth, creating a more favorable environment for investors looking for high-value returns.
Abhishek Banerjee, small case manager and founder at Lotusdew explained that some investors are seeing potential in China’s market as a “deep value trade.”
However, he cautioned that this could be a “value trap” if the expected returns fail to materialize.
US Dollar Strength and Treasury Yields Add Pressure on Indian Markets
The strengthening US dollar and higher US Treasury yields have created a compelling alternative for FPIs, who are increasingly opting for these assets over Indian equities.
According to Srivastava, the stronger dollar and the expectation of a robust US economy are leading more foreign investors to favor US securities.
Domestic Influences: Earnings Concerns and Market Valuations
Alongside global factors, domestic concerns have also contributed to the outflow. Although there have been some recent corrections, Indian stocks are still considered overvalued in comparison to other global markets.
Additionally, corporate earnings in India have fallen short of expectations, raising doubts about the growth potential of several key industries.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, suggested that the FPI selling trend is likely to continue in the short term unless upcoming Q3 results indicate an improvement in corporate earnings.
Such an improvement could slow down or potentially reverse the current FPI outflow trend, as earnings recovery may renew investor confidence in Indian equities.
Domestic Political and Market Factors Affecting FPI Sentiment
Other factors influencing the market include the uncertainty around the US presidential transition, which will not be finalized until January 2025, and domestic events like Maharashtra’s upcoming assembly election results.
According to Sunil Damania, Chief Investment Officer at MojoPMS, these factors could impact the near-term direction of Indian markets, especially if retail investors react strongly to market volatility.
Regulatory Moves and New FPI Registrations
Despite the recent withdrawals, India continues to attract foreign investor interest, with 40-50 new FPI registrations in November alone.
Manoj Purohit, Partner at BDO India, attributed this interest to recent regulatory changes.
The Securities and Exchange Board of India (SEBI) has eased regulations for non-resident Indians (NRIs), allowing them to invest up to 100% and making it easier for foreign entities to operate in India.
Mixed FPI Activity in Debt Markets
While FPIs are withdrawing from equities, they are still actively participating in India’s debt market. In November, FPIs invested Rs 599 crore in the debt general limit and Rs 2,896 crore in the debt voluntary retention route (VRR).
Overall, FPIs have invested Rs 1.06 lakh crore in the Indian debt market so far this year, signaling that foreign investors continue to see potential in India’s fixed-income instruments despite current equity market volatility.
Outlook: A Wait-and-Watch Approach
The near-term outlook for FPIs in Indian equities remains uncertain. Analysts suggest that further FPI selling is likely unless India’s economic data and Q3 corporate results show signs of strong recovery.
In such a scenario, the trend may shift, with FPIs resuming buying activity as they regain confidence in India’s growth story.
However, until such positive indicators emerge, FPIs are expected to maintain a cautious approach, selectively investing in Indian debt instruments while exploring higher-value opportunities in other regions, particularly China.
Conclusion
Foreign portfolio investors are pulling substantial funds from Indian equities, driven by high valuations, domestic and global uncertainties, and a preference for other investment opportunities.
However, recent FPI registrations indicate that foreign interest in India remains alive, and future market performance, along with regulatory adjustments, may draw investors back if conditions improve.
As Indian markets adjust to these developments, both domestic and foreign participants are likely to keep a close eye on upcoming financial and political indicators.
