Foreign portfolio investors (FPIs) continued their
three-month streak in Indian equities, but inflows moderated in August, driven
by domestic and global factors. However, they were consistent buyers in June
and July after election-related jitters faded and stability returned to Indian
markets. However, FPIs halted their buying streak with the onset of the new
fiscal year 2024-25 (FY25).
"FPI investment in equity is steadily coming down recently with net investment of only ₹7,320 crore in August compared to ₹32,365 crore in July. Bulk of the buying that FPIs are doing are through the ‘primary market and others’ category. They have been consistent sellers in the cash market because of the elevated valuations,'' said Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
What's fuelling the sell-off from FPIs in Indian markets?
1.High valuation of the Indian stock market
According to Geojit's Dr Dr. V K Vijayakumar, 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 FY 25
earnings, India is the most expensive market in the world. FPIs have
opportunities to invest in cheaper markets, so their priority is markets other
than India,'' he said.
Vaibhav Porwal, Co-founder, Dezerv agreed. "Valuations
in the Indian equity market have risen to relatively high levels, leading FIIs
to exercise caution when investing in India. They have been selectively investing
in defensive market segments, focusing on sectors such as healthcare and
FMCG,'' said Porwal.
Market analysts reiterated that the FPIs have been involved
in mixed activity recently, with bouts of buying and selling, a trend that will
likely continue for some time. ‘’FPIs have been selling in the secondary
market, where valuations are perceived to be high, and redirecting their
investments towards the primary market, which offers relatively lower
valuations,'' said Vipul Bhowar, Director Listed Investments, Waterfield
Advisors.
2.Unwinding of Yen
According to Vipul Bhowar of Waterfield Advisors, the
unwinding of the Yen carry trade on August 24 significantly impacted FPI
behaviour, leading to substantial selloffs in Indian equities. In response to Bank
of Japan Governor Kazuo Ueda's hawkish tone at the July monetary policy
meeting, speculators unwound their yen carry trades, pushing the yen stronger.
The term refers to borrowing Japan's cheap currency to invest in countries
offering higher yields.
3.US Fed rate cut bets
‘’The unwinding of Yen coincided with rising fears of a
potential recession in the U.S. and disappointing economic data, which further
exacerbated the market's reaction,'' said Bhowar of Waterfield.
US Federal Reserve Chairman Jerome Powell’s statement at Jackson Hole signalling imminent rate cuts and greater confidence in a soft landing helped prop up emerging markets, including India. Market analysts say FPI flows are expected to remain volatile due to high rate-cut bets.
‘’The US Fed is expected to start its rate-cut cycle in September. Historically, rate-cut cycles in the US market have not been favourable for their equity markets. We anticipate that FIIs will shift their focus to emerging markets, deploying capital where valuations are more appealing. However, India may not be a significant beneficiary of these flows,'' said Vaibhav Porwal of Dezerv.
4.Tax changes announced in Union Budget 2024
Market analysts said the spike in the capital gains tax and
the removal of the indexation benefit were a few factors that resulted in a
higher tax burden for investors. Another factor was a hike in the securities
transaction tax (STT) rate for FnO trades, which will impact liquidity and make
hedging costlier.
’'FPIs may opt to prioritise sectors that benefit from domestic reforms and growth, such as technology and infrastructure, while approaching sectors vulnerable to global economic downturns with prudence,'' said Bhowar.
5. Shift to debt instruments
According to Geojit's Dr. V K Vijayakumar, FPIs are buying
in the debt market mainly because the INR has been stable this year, and this
is expected to continue. ‘’On the debt market front, the strong buying trend
among FIIs can be traced back to India’s addition to JP Morgan’s Emerging
Market government bond indices earlier this June,'' said Vaibhav Porwal of
Dezerv.
Analysts added that the recent announcement of increased capital gains tax on equity investments has also prompted foreign portfolio investors to sell off their holdings, shifting funds towards safer debt instruments.
‘’The inclusion in global bond indices, attractive interest rates, stable economic growth, shift from equities, and favourable long-term outlook have been the key factors driving FPIs to invest in debt,'' said Vipul Bhowar of Waterfield Advisors.
When will FPI inflows resume?
Analysts say the selling trend is likely to continue since India is the most expensive market in the world now, and “it is rational for FPIs” to sell here and move the money to cheaper markets. "This picture doesn’t change even if the market turns more bullish on fears regarding US recession receding,'' said Dr. V K Vijayakumar.
"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,'' said Vipul Bhowar of Waterfield Advisors.
This article taken by livemint.com
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