Foreign portfolio investors (FPIs) ended up as net sellers in the Indian equity market in FY23 as rising global interest rates and high market valuations kept foreign investors away from the domestic stocks for the most part of the previous fiscal. 

As per provisional data, FPIs have pulled out a net investment of ₹37,632 crore from Indian equities in FY23 followed by a massive outflow of ₹1.40-lakh crore in FY22. 

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said rising bond yields and the spike in dollar-triggered capital outflows are among the major reasons for FPI sell-off in FY23. “Relatively high valuations of the Indian market prompted FPIs to continuously sell in India. China reopening also triggered selling in India and buying in China,” he added.   

FPIs were net sellers in the domestic equity market in 7 out of 12 months in FY23. Mayur Shah, PMS Fund Manager, Anand Rathi Advisors, said “With rising interest rates, equity valuation becomes further expensive. The inflation and geopolitical tension had forced the central bankers to increase interest rates to curtail inflation.” 

Shah also added that depreciation of emerging market currencies also added redemption pressure to global funds, which kept FPI interest away from the for the whole of FY23.

Record inflow

Indian equities witnessed a record inflow of ₹2.74-lakh crore in FY21 amid surplus liquidity in the global markets and a record number of public issues in the Indian market. However, FPI interest in domestic equities began to taper with the rise in global interest rates, especially by the US Federal Reserve. The foreign investors’ selling spree, which began in October 2021, lasted till June 2022. However, they were mostly net buyers between July and December. 

Vijayakumar said although the near-term outlook for FPI investments looks more positive, Indian valuation continues to be relatively high. He, however, added that the recent market correction has made valuations a bit more reasonable than earlier. 

“Interest rate cycle is likely to see a pause in FY24 as high interest rates have disturbed the financial sectors in developed markets,” Shah said, adding, “With slowdown in global markets the commodity and crude prices remain under control which benefits India to control the trade deficit.” 

He added that although a pause in rising interest rates and reduced deficit makes Indian equity more attractive, any further escalation in geopolitical tensions and spiral effect of failure of financial institutions could pose a risk to the foreign fund flows.