Why did FPIs dump ₹25,586 crore worth of Indian shares in May—Explained with 4 key reasons

Foreign portfolio investors (FPIs) have remained sellers in Indian markets ever since reducing their buying momentum with the onset of the new fiscal 2024-25 (FY25). Volatility due to Lok Sabha elections 2024, hawkish stance from global central banks, outperformance in Chinese markets, and other global cues have weighed on the sentiments of foreign investors.

FPIs offloaded ₹25,586 crore worth of Indian equities and the total outflow stands at ₹12,911 crore as of May 31, taking into account debt, hybrid, debt-VRR, and equities, according to National Securities Depository Ltd (NSDL) data. The total debt inflows stand at ₹8,761 crore in May 2024.

“FPIs have been sellers in equity on most trading days in May. As per NSDL data FPIs have sold equity for ₹25,586 crore in May. The selling in the cash market till 30th has been excessive at ₹43827 crore,” said Dr V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

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FPIs extend April’s selling streak: Key reasons behind the outflow

Broadly, market experts highlighted that the uncertainty over the outcome of Lok Sabha elections 2024, high US bond yields, outperformance of Chinese stocks, soaring Indian market valuations in the short-term, delay in US Fed interest rate cuts, and ongoing geopolitical conflicts in the Middle-East exerted pressure on Indian markets.

–Outperformance of Chinese stocks

The main trigger for the FPI selling has been the outperformance of the Chinese stocks. The Hang Seng index boomed eightper cent in the first half of May triggering selling in India and buying in Chinese stocks.

–High US bond yields

Another reason was the spike in US bond yields. Whenever the US 10-year bond yields rose above 4.5 per cent FPIs sold in emerging markets like India and moved money to bonds. Above target inflation in the US has discouraged the US Federal Reserve to begin rate cuts, which has kept bond yields higher. This led to more selling in the Indian cash market.

–High valuation, weak quarterly earnings

The relatively high valuations and weak earnings, particularly in the financial and IT sectors where FPIs have a high allocation amid the global risk-off sentiment have led to an extended period of FPI selling, according to Vipul Bhowar, Director, Listed Investments, Waterfield Advisors.

–Volatility ahead of Lok Sabha election results

Analysts noted that apprehensions stemmed from the unexpectedly low turnout in the elections which led to a rise in the markets’ fear gauge -‘VIX index’. The market which had already discounted a victory by the ruling BJP was a bit unsure during May, which led to cautious sentiment in several sessions.

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When will FPI inflows resume?

The long-term outlook for FPI flows into Indian debt is positive due to India’s inclusion in global bond indices. However, near-term flows are being impacted by global macroeconomic uncertainty and volatility. The trend will reverse once the interest rate outlook becomes clearer, according to analysts.

‘’FPI activity in June will be crucially influenced by the election results to be announced on June 4 and the market response to that. If the election results ensure political stability the market is likely to respond positively to that. FPIs also are likely to turn buyers in such a scenario. However, in the medium term US interest rates will exert more influence on FPI flows,” said Geojit’s Dr V K Vijayakumar.

So long as this ‘Sell India, Buy China’ trade sustains, the FII selling trend will weigh on the markets. The situation can change dramatically when clarity emerges on the election outcome, according to the analyst.

Strong economic growth, manageable inflation, political stability, and the expectation that the Reserve Bank of India is done tightening monetary policy create a positive outlook for the Indian economy, marking a turnaround from their net selling in May, according to Waterfield Advisors’ Vipul Bhowar.

FPI activity in Indian markets

In the first week of May, FPIs snapped their April’s selling streak and turned net buyers in Indian equities, however, sell-off continued in debt market. FPIs offloaded ₹8,671 crore in Indian equities in April and ₹10,949 crore in debt markets over high US bond yields. However, they pumped ₹35,098 crore in Indian equities during March 2024 – the highest inflows recorded in the first three months of 2024. FPI outflow initially declined in February 2024 until they were net buyers by the end of the month, despite high US bond yields.

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The inflow into Indian equities stood at ₹1,539 crore in February 2024 and the debt market investment rose to ₹22,419 crore during the month on top of the ₹19,836 crore bought in January. The inclusion of government bonds to JPMorgan and Bloomberg debt indices had especially triggered foreign fund inflows into debt markets. FPIs turned massive sellers in January 2024 snapping their buying streak as investments saw a sharp uptick in December 2023 after they reversed their three-month selling streak in November 2023.

However, inflow intensified in December on strong global cues after the US Federal Reserve signalled the end of its tightening cycle and raised expectations of a rate cut in March 2024. This led to a crash in US bond yields and triggered foreign fund inflows into emerging markets like India.

For the entire calendar year 2023, FPIs bought ₹1.71 lakh crore in Indian equities and the total inflow stands at ₹2.37 lakh crore taking into account debt, hybrid, debt-VRR, and equities, according to NSDL data. FPIs’ net investment in Indian debt market stands at ₹68,663 crore during 2023.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.