Foreign portfolio investors (FPIs) started the year with robust interest in Indian equities, but a shift in sentiment has seen them turn cautious. From being net buyers in December 2023 with a record inflow of ₹66,134 crore, FPIs have become net sellers in January 2024, offloading equities worth ₹13,047 crore in the first three weeks, data with depositories showed.

This change in strategy on equities is attributed to a combination of factors, including hawkish remarks from the US Federal Reserve, disappointing Q3 results from HDFC Bank, escalating tensions in West Asia, and China’s weak GDP numbers. The past week alone witnessed FPIs selling equities worth ₹24,713 crore in the last four trading sessions, with a substantial portion linked to HDFC Bank shares.

Jitendra Gohil, Chief Investment Strategist at Kotak Alternate Asset Managers Ltd., believes the recent FPI selling across emerging markets is a temporary response to the pushback on Fed rate cuts. He expects FPI equity inflows to improve in the coming months, especially into India, as the underlying fundamentals remain attractive.

“The underlying fundamentals that attract FPI flows in India have improved. India’s weight in the MSCI EM Index is headed towards 20 per cent, as growth worries in China seem to be structural,” he said.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, points out two main reasons for the sudden FPI selling spree. First, the rise in U.S. bond yields triggered capital outflows from emerging markets. Second, FPIs capitalised on less-than-expected results from HDFC Bank to execute massive sales and increase short positions.

On Wednesday, FPIs were understood to have sold in a single day equities worth $6.5 billion across various emerging markets, of which India accounted for about $1.5 billion (mainly HDFC Bank shares), experts said.

Key events

Despite the net selling in January 2024, experts emphasise that it doesn’t indicate a gradual withdrawal of FPIs from equities in India. The outlook for robust FPI inflows in 2024 depends on three key events: the US Fed rate cut, Indian elections, and the RBI rate cut.

Seshadri Sen, Head of Research and Strategist at Emkay Global Financial Services, anticipates record FPI flows in 2024-25, especially if there is a US Fed rate cut. The global risk-on scenario could lead to strong FPI inflows, with India securing a larger share.

Looking back at 2023, total FPI inflows in equities reached ₹1.71-lakh crore, a significant turnaround from the ₹1.21-lakh crore outflows in 2022.

In the debt market, FPIs are front-loading government securities purchases ahead of India’s bond inclusion in global indices from June 2024. Experts see positive factors such as the stability of the rupee and core inflation falling below the 4 per cent mark as influencing FPI strategies in the fixed income space. FPIs injected a record ₹15,647 crore into Indian debt markets in the first three weeks of January 2024, building on the momentum from 2023, when total debt inflows hit a six-year high of $7.3 billion.

In December 2023 alone, FPI debt inflows reached a record ₹18,302 crore, demonstrating a sustained interest in the Indian debt market despite global uncertainties and market fluctuations.