FPI inflows poised to surge after a modest H1 2024; June sees strong recovery
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After a strong 2023, foreign portfolio investor (FPI) inflows into Indian equities were relatively modest in the first half of 2024, amounting to ₹3,201 crore. This follows a substantial inflow of over ₹17,000 crore in the previous year.
Despite the market's bullish trend and multiple new highs, FPIs remained cautious due to uncertainty surrounding the Lok Sabha elections, high valuations, the outperformance of Chinese markets, hawkish stances from central banks, and other global cues.
However, once concerns about the new government settled, FPIs returned as buyers in June after two months of selling. In June, FPIs purchased Indian equities worth ₹26,565 crore, marking the second-highest buying spree of 2024. The highest was in March, with ₹35,098 crore in inflows.
June's buying activity turned FPIs into net buyers for the year. Before June, FPIs had sold Indian equities worth ₹25,586 crore in May and ₹8,671 crore in April. The start of the year saw significant selling, with ₹25,744 crore in January, followed by modest inflows of ₹1,539 crore in February.
However, experts believe that FPI inflows are projected to increase going forward. A key driver of this trend is the inclusion of Indian government bonds in the JP Morgan Global Bond Indices, effective June 28, 2024. This inclusion is expected to attract approximately $25-30 billion over 10 months, significantly boosting inflows into India's debt market. Another trigger for increased FPI investments is the anticipated rate cut in the US. One rate cut is expected by the third or early fourth quarter of the calendar year (October-December quarter). This potential monetary easing could enhance the attractiveness of emerging markets, including India, for foreign investors.
"FPI’s investment of ₹26565 crores in equity in June marks a reversal of their strategy of selling in the two preceding months. Political stability despite the BJP not getting a majority on its own, and the sharp rebound in markets aided by steady DII buying and aggressive retail buying, has forced the FPIs to turn buyers in India. It appears that FPIs have realized that selling in the most-performing market would be a wrong strategy. FPI buying can be sustained provided there is no sharp up move in U.S. bond yields.
India’s inclusion in the JP Morgan Bond Index is certainly positive. The debt inflows for 2024 so far stand at ₹68674 crores. In the long term, this will reduce the cost of borrowing for the government and reduce the cost of capital for corporations. This is positive for the economy and therefore for the equity market," said V K Vijayakumar, Chief Investment Strategist, at Geojit Financial Services.
FPI inflows in the first half included net sales of ₹25,744 crore in January but rebounded with inflows worth ₹31,056 crore in March. The outlook for July- December is optimistic due to economic growth prospects, potential rate cuts, and positive sentiment.
Foreign Portfolio Investment (FPI) inflows are projected to increase significantly in June 2024. The inclusion of Indian government bonds in the JP Morgan Global Bond Indices, effective June 28, 2024, is expected to be a major driver of this trend. This inclusion is anticipated to bring in approximately $25-30 billion over a 10-month period, significantly boosting inflows into India's debt market.
This move will see Indian government bonds being gradually added to the indices, starting with a 1% weight per month until it reaches a maximum of 10%. Additionally, MSCI's decision to raise India's weightage in its indices to an all-time high of 18.2% has further attracted FPI interest. This adjustment is expected to bring up to $1.2 billion in passive foreign flows following the review in February 2024.
Overall, these developments indicate a strong positive outlook for FPI inflows into India, driven by improved macroeconomic conditions, regulatory changes, and significant index inclusions. This influx is expected to support both the equity and debt markets, enhancing stability and growth prospects for the Indian economy.
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