FPIs Exit Indian Market with ₹94,000 Crore Outflow in October, Driven by Rising Valuations and Chinese Investment Appeal

In a significant development, foreign portfolio investors (FPIs) pulled out a staggering ₹94,000 crore (around $11.2 billion) from Indian equities in October 2024. This marks the highest outflow in a single month, largely influenced by high domestic valuations and more attractive investment prospects in China. With global economic trends and domestic factors influencing investor behavior, understanding this shift provides valuable insight into the current state and future potential of the Indian market.

Record Outflows Amid High Valuations and Global Shifts

The outflow of ₹94,000 crore in October is unprecedented, surpassing previous records set in March 2020 when FPIs withdrew ₹61,973 crore. This surge in outflows comes after FPIs recorded substantial investments just a month earlier, with a nine-month high inflow of ₹57,724 crore in September. Since June, FPIs have been net buyers, making October’s exodus particularly striking.

FPIs began 2024 as net buyers, with steady investment activity excluding withdrawals in January, April, and May. This pattern of investment highlights a cautious but optimistic outlook, disrupted in October due to high valuations in Indian markets and China’s emerging attractiveness.

Global Factors Impacting FPI Sentiment

The shift in FPI behavior reflects a range of global economic factors:

• Geopolitical Tensions: Global events, including ongoing geopolitical developments, have significant influence over investor sentiment. Heightened geopolitical risk often prompts investors to reallocate assets toward regions with perceived stability and growth potential.
• Interest Rate Changes: Fluctuations in global interest rates, particularly in the U.S., impact the attractiveness of emerging markets like India. Higher rates in the U.S. can reduce the appeal of equities in other regions, prompting FPIs to diversify.
• Chinese Economic Rebound: China’s proactive measures to stimulate economic growth, coupled with more attractive equity valuations, have lured investors. Many FPIs view China as a compelling alternative, especially as it offers potential growth with lower valuation risks.
• U.S. Presidential Election Outcome: The upcoming U.S. Presidential election adds uncertainty, as shifts in policies could reshape international relations and trade policies, affecting investment flows into emerging markets like India.

Himanshu Srivastava, Associate Director at Morningstar Investment Research India, emphasized the importance of these factors, noting that future foreign investments in Indian equities will be influenced by these broader global trends.

Also Read: FII Sell-Off and Market Correction: Temporary Dip or New Trend?

Domestic Indicators Shaping FPI Decisions

On the home front, several key factors influence FPI sentiment toward Indian equities:

• Inflation and Interest Rates: India’s inflation trends and central bank actions on interest rates will be closely monitored. High inflation can erode returns, making equities less attractive to foreign investors.
• Corporate Earnings: The earnings performance of major Indian corporations serves as a direct indicator of market health. FPIs are particularly interested in sectors that show robust growth potential, and strong earnings often lead to renewed FPI interest.
• Festive Season Demand: Seasonal demand, especially during the festive season, reflects consumer sentiment and economic resilience. Strong demand signals a healthy economy, increasing FPI confidence.

These factors, combined with external conditions, have created an environment where FPIs are increasingly cautious about maintaining high exposure in the Indian market.

Impact of October’s FPI Sell-Off on Indian Equity Indices

The substantial FPI withdrawal in October had a noticeable impact on Indian benchmark indices, which saw a roughly 8% decline from their recent peaks. This correction underscores the influence of FPI movements on market stability. When FPIs are net sellers, it often triggers further selling across the board, creating a ripple effect.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that while financial stocks faced intense selling pressure, the sector has shown resilience. Domestic institutional investors (DIIs) and high-net-worth individuals (HNIs) have been instrumental in absorbing these sales, maintaining sector stability.

Why Chinese Markets are Drawing FPIs Away from India?

Chinese markets have emerged as an attractive alternative for FPIs due to a combination of factors:

• Attractive Valuations: Compared to Indian equities, Chinese stocks are currently valued lower, making them more appealing to FPIs seeking better returns on their investments.
• Economic Stimulus Initiatives: China’s government has introduced a series of measures aimed at economic recovery, including stimulus packages. This has made Chinese equities more competitive in the eyes of global investors.

The appeal of Chinese stocks has resulted in a noticeable capital shift from Indian to Chinese equities, marking a temporary but significant diversion of funds.

FPI Movements in Debt Markets

In addition to the equity market, FPIs have also been active in Indian debt markets. In October, they withdrew ₹4,406 crore from the debt general limit while investing ₹100 crore through the Voluntary Retention Route (VRR). Despite the volatility in equities, FPIs have shown consistent interest in Indian debt, with investments totaling ₹1.06 lakh crore this year.

The debt market continues to attract foreign investment, offering a relatively safer avenue with predictable returns amidst equity market uncertainties.

Also Read: Shankar Sharma Highlights Caution for Indian Stock Market in Samvat 2081, Sees Potential in Chinese Equities

Future Outlook: Will FPIs Return to Indian Equities?

The future of FPI investments in Indian equities hinges on several domestic and international factors:

• Stable Valuations: A correction in Indian equity valuations could make the market more attractive to FPIs. Currently, high valuations act as a deterrent for fresh investments.
• Global Economic Stability: As global uncertainties like geopolitical tensions and interest rate changes stabilize, FPIs may look to rebalance portfolios. Emerging markets, including India, could again see inflows if they are viewed as less risky.
• Policy Developments in China: Any change in Chinese economic policies that reduces the appeal of its equities could drive FPIs back toward Indian markets.

Conclusion

The record ₹94,000 crore outflow by FPIs in October underscores the complex interplay of global and domestic factors influencing foreign investment. High valuations in Indian equities, along with attractive opportunities in China, have led to this unprecedented exodus. However, if key factors such as valuation, corporate earnings, and global economic stability align favorably, India may again become a preferred destination for FPIs. Until then, domestic investors are likely to play a critical role in maintaining market resilience.