Resilient Indian equity markets, which saw key benchmarks Nifty50 and Sensex hitting an all time high this past week, may have prompted Foreign Portfolio Investors (FPIs) to put brakes on their aggressive equity selling spree, bringing down their net equity outflows so far this month to ₹423 crore, depositories data showed.

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This net outflow of ₹423 crore till February 24 is sharply down from the net selling of ₹25,744 crore in January 2024. FPIs pumped a record $ 8 billion in Indian equities in December last year.

Interestingly, the slowdown in FPI selling in recent days comes despite the rising US Bond yields. 

Normally when the US 10-year yield rises above 4.15 per cent, the FPIs sell heavily. But this is not happening now, V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said. 

“Since the DIIs, HNIs and retail investors are the dominant players now and their sustained buying is pushing the market to newer records, FPIs have taken a backseat”, he added.

The resilience of the market is preventing the FPIs from selling aggressively despite attractive bond yields in the US, according to Vijayakumar.

Jitendra Gohil, Chief Investment Strategist, Kotak Alternate Asset Managers Ltd, said “India is the 5th largest economy but the weight in global Indices is less than 2 per cent, this gives us confidence that FPIs will use any major correction as a buying opportunity after missing out on mark outperformance of Indian equities”.

He also said that FPIs are taking note of marked improvement in Indian macro stability parameters, which is clearly reflected in the resilience of the INR and India’s bond yields.

FPI debt buying sizzles 

FPIs continue to resort to heavy buying in debt markets, pumping in as much as ₹ 18,589 crores in February so far. All eyes are on the FPI buying action this week to see if they would beat the January 2024 purchase level of ₹ 19,837 crore.

Shantanu Bhargava, Managing Director, Discretionary Investment Services, Waterfield Advisors, said the inclusion of Indian bonds in global indices has increased their prominence during a period when the US economy is experiencing difficulties and the USD appears to be reaching its peak. 

In contrast, India has an expanding economy characterised by favourable macroeconomic attributes and fiscal stability. “Consequently, bond inflows may eventually exceed what the mathematics underlying index inclusion might predict, as increased inflows have already demonstrated”, he said.

“We anticipate that India bond risk premia will continue to decline in light of the aforementioned dynamic”.

Furthermore, a sensible budget deficit, as proposed by the Union finance minister in this year’s interim budget, will provide the RBI with more leeway to make appropriate policy decisions, which will undoubtedly boost FPI confidence, he added.

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Inflation has already shown signs of stabilisation, falling sequentially to 5.10 per cent in January 2024 from 5.69 per cent in December 2023. Core inflation has fallen to a 49-month low of 3.60 per cent.

Ahead of India’s inclusion in global bond indices from June 2024, FPIs have been briskly buying sovereign debt since October last year. FPIs had infused ₹18,302 crore in the debt market in December 2023,  ₹14,860 crore in November 2023, and ₹6,381 crore in October last year.