Foreign Portfolio Investors (FPIs) remained bearish on Indian equities going by the net outflows of ₹6,300 crore so far this month (till April 26) amid concerns around Mauritius Tax Treaty and US Bond Yield surge. 

The geopolitical concerns arising from the Iran-Israel conflict had also weighed in on FPI interest in Indian equities this month despite top Indian corporate earnings growth is largely in line with expectations, said equity market experts.

Taken together with flows of previous months this calendar year, the net FPI investments into Indian equities so far in 2024 stood at ₹4,589 crore, official data with depositories showed. 

This continued selling in equities in April 2024 comes at a time when the country is going through a seven phased general elections that commenced on April 19 and is due to end on June 1.  Also FPIs holding/ ownership of Indian stocks is currently at a decadal low of about 16.1 per cent. 

This past week also saw the Indian volatility index Nifty VIX — which denotes volatility expectation—crackdown 20 per cent to around 10, setting the stage for an upswing in equities in the coming days, said analysts.

Debt Market Flows

 FPIs remained net sellers on the debt side too with outflows of ₹10,640 crore till April 26, data showed. However, despite the selling in April, FPIs total net investments into debt remained in positive territory at ₹45,218 crore till April 26 this year.

FPIs had net sold equities worth ₹25,744 crore in January 2024 but made a reversal with net investments of ₹ 1539 crore and ₹35,098 crore in February and March 2024, respectively.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said that the trigger for this renewed FPI selling, in both equity and debt, is the sustained rise in US bond yields. The 10-year bond yield now stands at around 4.7 per cent which is hugely attractive for foreign investors, he said. 

The latest core CPI inflation in US jumped to 3.7 per cent against the expectation of 3.4 per cent. This means the prospects of early rate cuts by the Fed are receding, he said. This will keep yields high triggering more FPI outflows in both equity and debt, Vijayakumar added.

“The positive factor is that all FPI selling in the equity markets is getting absorbed by DIIs, HNIs and retail investors. This is the only factor that may rein in FPI selling”, Vijayakumar said.

Ramesh K Vaidyanathan, Managing Partner at law firm BTG Advaya said that FPIs were somewhat spooked by the changes to the DTAA between India and Mauritius, with greater scrutiny applicable now on investments into India through Mauritius. 

“I feel this is a temporary phenomenon, and the domestic institutional investors (with their healthy liquidity) and also the HNIs will continue to drive the momentum in the Indian market going forward. The macro factors also look good, with the ongoing Indian elections signalling policy stability and large companies returning healthy earnings”, he said.

The spiralling inflation in the US has also triggered spike in bond yield (resulting in sale in the Indian market). The geopolitical concerns revolving around situations in the middle east and Iran/Israel has also somewhat contributed to this fleet of capital, Vaidyanathan added.

Sunil Damania, Chief Investment Officer, MojoPMS, said there is a potential slowdown in FY25 FPI inflows after record investments in FY24, with current market valuations suggesting a subdued outlook. 

“Despite historically minimal impact on market returns, the influence of FPI investments has diminished compared to previous periods, owing to the strength of domestic inflows”, Damania said.

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