After a Stellar 2023, FPI Flows into Indian Equities Take a Hit in 2024
Foreign Portfolio Investors (FPIs) dramatically reduced their investments in Indian equities in 2024, logging net inflows of just ₹5,052 crore. This marks a sharp decline compared to the extraordinary ₹1.71 lakh crore inflows recorded in 2023. Elevated valuations, geopolitical uncertainties, and macroeconomic concerns drove this decline, according to data from depositories.
While FPI interest in equities waned, debt markets became the preferred investment avenue. FPIs invested ₹1.12 lakh crore in Indian debt markets, a significant increase from ₹68,663 crore in 2023.
Why Did FPI Inflows Decline in 2024?
- High Valuations: The premium valuation of Indian equities prompted FPIs to shift focus to more attractively priced markets, such as China.
- Global Geopolitical Uncertainty: Heightened tensions, including the Israel-Iran conflict and uncertainty surrounding US tariff policies, increased risk aversion among global investors.
- Domestic Challenges: A weaker rupee, slower GDP growth, rising inflation, and subdued corporate earnings further dented investor confidence.
Himanshu Srivastava, Associate Director of Manager Research at Morningstar, noted that China’s stimulus measures enhanced the appeal of its equities, redirecting substantial investments away from India.
Sectoral and Monthly Trends
In 2024, financial services experienced the highest outflows at ₹54,500 crore, followed by oil and gas at ₹50,000 crore and FMCG at ₹20,000 crore. FPIs began the year with significant withdrawals of ₹25,700 crore in January, driven by rising US bond yields. A brief recovery in February and March brought inflows of ₹36,600 crore, fueled by India’s strong economic fundamentals. However, this trend reversed in April and persisted into May due to political uncertainty during India’s general elections.
A notable recovery occurred between June and September, culminating in a record ₹57,359 crore net inflow in September. This was largely driven by a US Federal Reserve rate cut. However, October marked a sharp reversal, with unprecedented outflows of ₹94,017 crore due to concerns over high valuations, muted earnings, and increased allocations to China.
Despite this volatility, December saw renewed interest, with net inflows exceeding ₹20,071 crore, signaling a potential revival.
FPIs Shift Focus to Debt Markets
While equity inflows were subdued, Indian debt markets attracted significant investments in 2024. Key factors driving this trend included:
- Index Inclusion: India’s inclusion in JP Morgan’s Government Bond Index boosted FPI interest, with further inclusions in indices like Bloomberg’s Emerging Market Index anticipated in 2025.
- Improved Fiscal Metrics: India’s fiscal deficit reduced from 5.1% to 4.9%, with a target of 4.5% in 2025. Strong forex reserves further enhanced investor confidence.
- Interest Rate Cuts: Expectations of rate cuts by the US Fed also made Indian debt markets more attractive.
Feroze Azeez, Deputy CEO of Anand Rathi Wealth, highlighted growing interest from global pension funds in Indian government bonds, which is expected to sustain inflows in 2025.
Outlook for 2025: A Promising Rebound
Despite a challenging 2024, experts remain optimistic about a recovery in 2025. Here are the key drivers:
- Corporate Earnings Growth: A cyclical upswing in sectors like manufacturing, capital goods, and infrastructure is expected to reignite FPI interest in equities.
- Global Economic Stabilization: Central bank rate cuts and improved geopolitical stability could act as tailwinds for FPI inflows.
- Debt Market Momentum: Continued inclusion in global bond indices and favorable fiscal metrics are likely to drive sustained inflows into Indian debt markets.
Vinit Bolinjkar, Head of Research at Ventura Securities, predicts that the revival in FPI flows will be driven by a combination of robust corporate earnings and attractive opportunities in domestic-oriented sectors.
Conclusion
FPI inflows into Indian equities witnessed a sharp decline in 2024, impacted by a mix of global and domestic challenges. Elevated valuations, geopolitical uncertainties, and economic headwinds deterred investments, while the debt market emerged as the preferred choice for FPIs.
Looking ahead, 2025 presents a brighter outlook. A combination of improving corporate earnings, easing valuation concerns, and supportive global factors is expected to revive FPI interest in equities. Simultaneously, the momentum in the debt market is likely to continue, bolstered by India’s growing inclusion in global bond indices and favorable macroeconomic conditions.
As the year unfolds, investors should keep a close eye on evolving global and domestic dynamics to capitalize on emerging opportunities in Indian markets.