Foreign Portfolio Investors (FPIs) remained net buyers of equities for the third straight month in August, but inflows moderated to ₹7,320 crore, depositories data showed.

The net investments in August 2024 was substantially lower than the inflows of ₹32,365 crore in July 2024 and ₹26,565 crore in June 2024.

Domestic and global factors, including higher capital gains tax announced in Budget, high equity valuations, yen carry trade unwind and US recession fears have driven this moderation in FPI flows, experts said.

So far this calendar year, FPI inflows stood at ₹42,886 crore. In the April-August 2024 period, FPI inflows stood at ₹31,992 crore.

FPIs had, this past week, made net investments of ₹9,200 crore, reversing the net selling trend seen in earlier three weeks. On Friday alone, FPIs pumped in ₹5,318.14 crore in equities while the domestic institutional investors (DIIs) were net buyers at ₹3,198.07 crore.

Capital market experts, however, feel that FPIs recent buying interest is unlikely to sustain in September, given the rich valuations in Indian equity market.

The likely US Fed rate cut in September may reignite FPI flows into emerging markets, but India may not be a big beneficiary, given the rich valuations here, they said.

India: Expensive market

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said that the fundamental reason for the poor FPI interest is the high valuation in the Indian market.

With Nifty now trading at above 20 times estimated FY25 earnings, India is the most expensive market in the world now, he said.

“FPIs have opportunities to invest in much cheaper markets and therefore, their priority is markets other than India,” Vijayakumar added.

He highlighted that bulk of the buying that FPIs are doing are through the ‘primary market and others’ category. In the cash market, they have been consistent sellers because of the elevated valuations, he said.

Other factors

Vipul Bhowar, Director Listed Investments, Waterfield Advisors said that the unwinding of the Yen carry trade on August 24 significantly impacted FPI behaviour, leading to substantial selloffs in Indian equities. “This unwinding coincided with rising fears of a potential recession in the US and disappointing economic data, which further exacerbated the market’s reaction,” he said.

The recent announcement of increased capital gains tax on equity investments in India has also prompted FPIs to sell off their holdings, shifting funds towards safer debt instruments, he added.

“While September is likely to see continued interest from FPIs, the flows would be shaped by a combination of domestic political stability, economic indicators, global interest rate movements, market valuations, sectoral preferences and the attractiveness of the debt market”, Bhowar said.

Vaibhav Porwal, Co-founder at Dezerv said that the valuations in the Indian equity market have risen to relatively high levels, leading FPIs to exercise caution when investing in India. They have been selectively investing in defensive market segments, focusing on sectors such as healthcare and FMCG, he added.

With the US Fed expected to start its rate cut cycle in September, FPIs are likely to shift their focus to emerging markets, deploying capital where valuations are more appealing. “However, India may not be a significant beneficiary of these flows,” he added.

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