May 19th 2024.
Foreign investors have been withdrawing a significant amount of Rs 28,200 crore from Indian equities this month due to uncertainties surrounding the outcome of the general elections and the attractive market conditions in China. This is a substantial increase from the net outflow of Rs 8,700 crore in April, which was driven by concerns over changes in India's tax treaty with Mauritius and a rise in US bond yields. In March and February, FPIs had made net investments of Rs 35,098 crore and Rs 1,539 crore respectively.
Looking ahead, the election results are expected to bring about a significant change in the flow of foreign investments in Indian equities. According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, political stability will attract a huge inflow of investments into the Indian market. He also adds that after the Lok Sabha elections, FPI inflows into India could strengthen due to three key factors - a potential easing of interest rates by the US Federal Reserve, positive resolutions in global geopolitical tensions, and India's increasing weight in the MSCI Emerging Markets Index.
Data from the depositories shows that FPIs have experienced a net outflow of Rs 28,242 crore in equities this month. This trend can be attributed to two main reasons. First, there is uncertainty surrounding the general elections, and FPIs tend to shy away from such situations and prefer to lock in their profits. Second, market valuations are high, as pointed out by Sunil Damania, Chief Investment Officer at MojoPMS.
Moreover, FPIs are also reallocating their funds to China and Hong Kong, which are currently trading at more attractive valuations compared to Indian stocks. Anirudh Naha, CIO-Alternatives of PGIM India Asset Management, believes that this is another reason for the outflow in Indian equities.
Vijayakumar adds that another trigger for FPI selling has been the outperformance of the Hong Kong index Hang Seng, which has seen a rise of 19.33% in the last month. FPIs are moving their investments from expensive markets like India to cheaper markets like Hong Kong.
On the other hand, FPIs have invested Rs 178 crore in the debt market during this period. According to Bharat Dhawan, Managing Partner of Mazars in India, this trend can be attributed to economic challenges such as recessionary pressures, inflationary concerns, and geopolitical tensions, which have made investors cautious.
Before this current outflow, FPIs had invested Rs 13,602 crore in March, Rs 22,419 crore in February, and Rs 19,836 crore in January. This was driven by the upcoming inclusion of Indian government bonds in the JP Morgan Index. In September last year, JP Morgan Chase & Co announced that it will add Indian government bonds to its benchmark emerging market index from June 2024. This is expected to attract around USD 20-40 billion in investments over the next 18 to 24 months.
In summary, FPIs have withdrawn a net amount of Rs 26,000 crore from equities in 2024 so far, while investing Rs 45,000 crore in the debt market. This trend is a reflection of the current economic and geopolitical climate, and it remains to be seen how FPIs will respond to the changing market conditions in the future.
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