FPIs take out Rs 25,586 cr from equities in May on poll jitters, attractive valuations in China

"The relatively high valuations and weak earnings, particularly in the financial and IT sectors where FPIs have a high allocation, along with political uncertainties such as ambiguity around the outcome of elections, global risk-off sentiment, and the appeal of Chinese markets, have led to FPI selling," said Vipul Bhowar, Director of Listed Investments at Waterfield Advisors.

New Delhi: Foreign investors pulled out a massive Rs 25,586 crore from Indian equities in May due to uncertainty surrounding the outcome of general election and outperformance of Chinese markets.

This was way higher than a net outflow of over Rs 8,700 crore in April on concerns over a tweak in India's tax treaty with Mauritius and a sustained rise in US bond yields.

Before that, FPIs made a net investment of Rs 35,098 crore in March and Rs 1,539 crore in February, while they took out Rs 25,743 crore in January, data with the depositories showed.

Going ahead, election results, which will be out on June 4, could determine FPIs flows into Indian equities in the near future.

In the medium term, US interest rates will exert more influence on FPI flows, Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said.

According to the data, Foreign Portfolio Investors (FPIs) made a net withdrawal of Rs 25,586 crore from equities in May.

"The relatively high valuations and weak earnings, particularly in the financial and IT sectors where FPIs have a high allocation, along with political uncertainties such as ambiguity around the outcome of elections, global risk-off sentiment, and the appeal of Chinese markets, have led to FPI selling", Vipul Bhowar, Director of Listed Investments at Waterfield Advisors, said.

"The main trigger for the FPI selling has been the outperformance of the Chinese stocks. The Hang Seng index boomed 8 per cent in the first half of May, triggering selling in India and buying in Chinese stocks," Vijayakumar said.

Another reason was the spike in US bond yields. Whenever the US 10-year bond yields rose above 4.5 per cent, FPIs sold in emerging markets like India and moved money to bonds. These two factors triggered the selling in equity in India, he added.

Further, robust GDP growth, manageable inflation and political stability can create a positive outlook for the Indian economy, marking a turnaround from their net selling in May.

GDP growth numbers released on Friday painted a very optimistic picture. Q4FY24 GDP growth came in at 7.8 per cent surpassing the 6.7 per cent expectation, while the full-year FY24 growth stood at 8.2 per cent.

Additionally, the record dividend of Rs 2.1 lakh crore from the RBI has provided further fiscal room for the government to continue focus on infra spending.

"These factors suggest that monthly FPI inflows could exceed a sustained Rs 30,000 crore (in this month) if the current government remains in power," Kislay Upadhyay, smallcase manager & Founder of FidelFolio, said.

Shailesh Saraf, smallcase Manager and CEO of Valuestocks, said " We are extremely bullish on the Indian markets as we are expecting the ruling party to come to power once again. Also if we look at the corporate profits for March 2024, there has been a 10 per cent Year-on-Year increase...which bodes well for the markets"

On the other hand, FPIs invested Rs 8,761 crore in debt and Rs 4,283 crore through debt-VRR (Voluntary Retention Route). Before this, foreign investors put in Rs 13,602 crore in March, Rs 22,419 crore in February, Rs 19,836 crore in January.

This inflow was driven by the upcoming inclusion of Indian government bonds in the JP Morgan Index.

Market experts believe that long-term outlook for FPI flows into Indian debt is positive due to India's inclusion in global bond indices.

However, near-term flows are being impacted by global macroeconomic uncertainty and volatility. Overall, FPIs withdrew a net amount of Rs 23,364 crore from equities in 2024 so far. They however invested Rs 53,669 crore in debt market.