FPIs make remarkable comeback; infuse Rs 2 lakh crore in equities in FY24

New Delhi: Foreign investors made a strong return by injecting more than Rs 2 lakh crore into Indian equities in 2023-24, driven by optimism surrounding the country's robust economic fundamentals amidst a challenging global environment.

Looking forward to 2025, Bharat Dhawan, Managing Partner at Mazars in India, said that the outlook is cautiously optimistic and anticipates sustained FPI inflows supported by progressive policy reforms, economic stability, and attractive investment avenues.

"However, we remain mindful of global geopolitical influences that may introduce intermittent volatility, emphasising the importance of strategic planning and agility in navigating market fluctuations," he added.

The outlook for FY25 from an FPI perspective, continues to remain strong, Naveen KR, smallcase Manager and Senior Director at Windmill Capital, said.

In the current fiscal 2023-24, Foreign Portfolio Investors (FPIs) have made a net investment of around Rs 2.08 lakh crore in the Indian equity markets and Rs 1.2 lakh crore in the debt market. Collectively, they pumped Rs 3.4 lakh crore into the capital market, as per data available with the depositories.

The dazzling resurgence came following an outflow from equities in the preceding two financial years.

In 2022-23, Indian equities witnessed a net outflow of Rs 37,632 crore by FPIs on aggressive rate hikes by the central banks globally.

Before this, they pulled out a massive Rs 1.4 lakh crore. However, in 2020-2021, FPIs made a record investment of Rs 2.74 lakh crore.

The flows from foreign investors were largely driven by factors such as inflation and interest rate scenarios in developed markets such as the US and UK, currency movement, the trajectory of crude oil prices, geopolitical scenario, and the health of the domestic economy among others, Himanshu Srivastava, Associate Director – Manager Research, Morningstar Investment Research India, said.

"Investors increasingly favoured Indian equities, drawn by the market's demonstrated resilience during uncertain periods. Compared to other similar markets, India's economy stood out as more robust and stable amidst global economic turbulence, further attracting foreign investment," he said.

smallcase's Naveen said that economies like the UK and Japan have fallen into recession, Russia and Ukraine are still at war, the USA's inflation is running hot and the debate of soft versus hard landing still persists, while China has become the global anti-hero. Therefore, India has stolen the spotlight and is delivering numbers with strong GDP growth even amidst a tough business environment.

After withdrawing funds in the preceding fiscal, FPIs poured a staggering Rs 1.2 lakh crore into the debt market too, marking a noteworthy shift in their capital flow. They took out funds to the tune of Rs 8,938 crore in FY23.

FPIs' debt investments have been extremely robust this fiscal due to attractive yields on Indian sovereign debt relative to the US treasury. This has been supported by strong macros in the form of the robust growth outlook for the Indian economy, stable inflation and a stable currency, and the stated objective of the Government to improve its fiscal deficit, Nitin Raheja, Executive Director, Julius Baer India, said. Additionally, the upcoming inclusion of Indian bonds in JP Morgan's index has led to an inflow in advance into the Indian debt markets.

Further, the expected global tapering in policy rates should make bond yields in emerging economies look even more attractive to investors making this trend of inflows into Indian debt more sustainable, he added. In September 2023, JP Morgan Chase & Co. announced that it would add Indian government bonds to its benchmark emerging market index from June 2024. This landmark inclusion, scheduled for June 2024, is anticipated to benefit India by attracting around USD 20-40 billion in the subsequent 18 to 24 months. This inflow was expected to make Indian bonds more accessible to foreign investors and potentially strengthen the rupee, thereby bolstering the economy, Morningstar's Srivastava said.

Overall, FPIs started the year 2023-24 on a positive note in April and incessantly purchased equities till August on the resilience of the Indian economy amid an uncertain global macro backdrop. During these five months, they brought in Rs 1.62 lakh crore. After this, FPIs turned net sellers in September and bearish stance continued in October too with an outflow of over Rs 39,000 crore in these two months.

However, FPIs became net investors in November and the optimism persisted in December too, when they purchased equity to the tune of Rs 66,135 crore. Again, they turned sellers and pulled out Rs 25,743 crore in January.

This could be on account of China opening up after the lockdown. This led FPIs to pull out their investments from other emerging markets like India and divert them toward China.

However, China struggled to sustain investor interest. Moreover, the fiscal year ended on a positive note as FPIs bought shares worth over Rs 35,000 crore in March.