Foreign Portfolio Investors (FPIs) have adopted a cautious stance in January, pulling out Rs 13,000 crore from Indian stocks in the first three weeks. This cautious approach is attributed to the high valuations of Indian stocks and the surge in US bond yields. In contrast, FPIs have shown bullishness in the debt market, injecting Rs 15,647 crore during the same period.
Data from depositories reveals that FPIs made a net investment of Rs 13,047 crore in Indian equities till January 19. However, a significant outflow of over Rs 24,000 crore occurred between January 17-19. Prior to this, FPIs had made substantial net investments of Rs 66,134 crore in December and Rs 9,000 crore in November.
Two primary reasons are cited for FPIs turning sellers. Firstly, the rise in US bond yields, particularly the 10-year yield climbing from 3.9% to 4.15%, triggered capital outflows from emerging markets. Secondly, high valuations in India, coupled with less-than-expected results from HDFC Bank, provided FPIs with a reason to engage in massive selling, according to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
The extensive selling by FPIs is speculated to include offloading their stake in HDFC Bank due to its disappointing quarterly results, as noted by Himanshu Srivastava, Associate Director, Manager Research at Morningstar Investment Research India. FPIs entered the new year cautiously, booking profits in the Indian equity markets as key indices reached all-time highs. Uncertainty over the interest rate scenario also played a role, prompting FPIs to stay on the sidelines and await further cues before deciding on investments in emerging markets like India.
Moreover, FPIs demonstrated a similar selling trend in other emerging markets such as Taiwan, South Korea, and Hong Kong. The cautious approach in the equity market stands in contrast to a bullish stance on the debt market. Expectations of rate cuts in India have increased, making long-term debt bonds more attractive in the event of a sudden drop in yield. This follows a net investment of Rs 18,302 crore in the debt market in December, Rs 14,860 crore in November, and Rs 6,381 crore in October.
The decision by JP Morgan Chase and Co. in September to include Indian government bonds in its benchmark emerging market index from June onwards influenced the inflow into the country’s bond markets in recent months.
Focusing on sector-specific investments, FPIs have been observed buying IT stocks in January. This shift follows optimistic management commentary after the Q3 results of IT companies indicated confidence in the revival of demand in the sector.
Looking at the broader picture, the total FPI flows for 2023 amounted to Rs 1.71 lakh crore in equities and Rs 68,663 crore in the debt markets, contributing a total of Rs 2.4 lakh crore to the capital market. This positive flow in Indian equities contrasts with the worst net outflow of Rs 1.21 lakh crore in 2022, driven by aggressive rate hikes by central banks globally. Before this outflow, FPIs had consistently invested over the last three years.
In summary, the cautious approach of FPIs in January, marked by a substantial withdrawal from Indian equities, is influenced by factors such as high valuations, disappointing results from HDFC Bank, and the surge in US bond yields. Despite this cautious stance in equities, FPIs exhibit confidence in the debt market, and their strategic investments reflect sector-specific considerations, such as the positive outlook on IT stocks. The overall investment scenario for 2023 appears positive, with substantial inflows into both equities and debt markets, rebounding from the challenging year of 2022.
The cautious stance of Foreign Portfolio Investors (FPIs) in January, marked by a significant withdrawal from Indian equities, reflects concerns over high valuations and global economic factors. The strategic move to inject funds into the debt market, driven by expectations of rate cuts and favorable conditions for long-term debt bonds, showcases FPIs’ adaptive investment approach. Sector-specific investments in IT stocks indicate a nuanced strategy, responding to positive Q3 results and optimism regarding demand revival. The overall trend suggests a dynamic and responsive investment landscape, navigating through uncertainties and capitalizing on emerging opportunities in both equity and debt markets.