Foreign portfolio investors (FPIs) reduced their holdings in Indian equities to a decade low of 16.2 per cent of overall market capitalisation, The drop in FPI holdings in percentage terms may be attributed to selling in some sectors, partly due to underperformance in financials, where FPIs have a substantial exposure, said experts.

Foreign portfolio investors have injected $25 billion into the equity market in 2023-24.

Overweight position

However, experts observed that FPIs still maintain a significant, albeit slightly reduced, overweight position in the financial sector. Meanwhile, Systematic Investment Plans (SIP) inflows continue to provide support to the market, averaging nearly $2 billion per month.

The overall FPI net inflows of $25 billion to India 2023-24 is the second highest ever after FY21’s $37 billion. 

After heavy net selling to the tune of ₹25,744 crore in January 2024 and modest net investment of ₹1,539 crore in February 2024, FPIs came back with a vengeance in March 2024 with net inflows of ₹35,098 crore, taking the overall inflows for calendar year 2024 to ₹10,893 crore ($ 1.7 billion), depositories’ data showed.

Underperformance

Alok Agarwal, Head Quant & Portfolio Manager, Alchemy Capital Management said FPI holdings in the Indian market has dropped to a decadal low largely due to a selloff triggered by portfolio underperformance and a spike in US bond yields.

“Despite the drop, FPI inflows in FY24 remained robust, indicating continued foreign investor confidence in the Indian market”, Agarwal said.

“We expect FPI flows to remain strong and would expect them to resume increasing their stake in Indian markets”.

Counterbalance

Additionally, the emergence of retail investors in the Indian stock market has played a crucial role in counterbalancing the impact of FPI outflows, with domestic mutual funds and direct retail investors significantly increasing their free float ownership of NSE listed companies, thereby reducing the influence of FPI flows, he said.

Sunil Damania, Chief Investment Officer, MojoPMS said historical trends suggest a potential slowdown in inflows for FY2025 following record investments by FPIs. 

Diminished returns

“After two consecutive years of being net sellers in FY2022 and FY2023, Foreign FPIs have made a robust return to the Indian market, injecting over ₹2 lakh-crore in FY2024”, Damania said.

“It’s noteworthy that over time, FPI inflows have exhibited minimal impact on market returns, owing to the strength of domestic inflows. Consequently, the influence of FPI investments on market returns has diminished compared to previous periods”.

Debt holdings

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said the distinct trend in FPI flows this year is the erratic nature of equity flows in contrast to the steady positive trend in debt inflows. 

“FPI inflows into debt has been steady this year and has reached an impressive figure of ₹55,857 crores in 2024 so far. This trend is likely to continue”, he said.

Vijayakumar said that the resilience of the Indian stock market and the improving macros of the Indian economy forced the FPIs to turn buyers in India. He said FPIs in March were big buyers in capital goods, automobiles, financials, telecom and real estate. They were sellers in IT, Vijayakumar added.

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