Foreign Portfolio Investors (FPIs) Offload Equities Valued at Rs 25,000 Crore in January

Foreign Portfolio Investors (FPIs) exhibited a noteworthy shift in their investment patterns in January, with contrasting trends observed in equity and debt flows. While equity markets experienced net selling amounting to Rs 25,734 crore, the debt market witnessed a substantial net buying of Rs 19,836 crore. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, sheds light on three key factors contributing to this divergence.

Factors Driving Trends:

1. Rise in US Bond Yields: In January, US bond yields surged to approximately 4.16%, a significant increase from the 3.88% recorded in December 2023. This surge prompted a shift of funds from equity to higher-yielding US bonds, influencing the observed outflows.

2. Valuation Concerns in Indian Equity: Indian equities emerged as the most expensive globally, with the Nifty trading at a Price-to-Earnings (PE) ratio of approximately 21 based on estimated earnings for FY24. This valuation led to a sell-off in Indian equities, contributing to the divergent trend.

3. Front Running in Indian Bond Market: Some FPIs engaged in front running in the Indian bond market, anticipating increased flows following India’s inclusion in the JP Morgan Emerging Market Bond Fund.

Future Outlook: Vijayakumar anticipates that future FPI inflows into the equity market will hinge on trends in US bond yields and global as well as Indian equity market movements. Given the recent correction in US bond yields, FPIs are unlikely to engage in substantial selling in February and may even transition to becoming buyers. On the other hand, the momentum in debt market inflows is expected to persist.

Conclusion: The dynamic interplay of global factors, valuations, and strategic positioning in anticipation of market developments highlights the nuanced nature of FPI behavior. As investors navigate these shifts, monitoring trends in both global and domestic markets will be crucial for anticipating future FPI movements and their impact on India’s financial landscape.