Foreign investors have pulled out a staggering Rs 44,396 crore from Indian equities in January 2024, signaling a significant shift in market sentiment as global and domestic headwinds weigh on investor confidence. The sharp withdrawal follows a more positive trend in December, when Foreign Portfolio Investors (FPIs) had invested Rs 15,446 crore in Indian stocks.
Factors Behind the Outflow
Several factors are contributing to the outflow of foreign capital from India, with a stronger dollar, rising US bond yields, and concerns over India’s earnings season topping the list. According to Himanshu Srivastava, Associate Director at Morningstar Investment Advisers India, the persistent depreciation of the Indian rupee has increased the pressure on foreign investors, prompting them to pull their funds from the Indian equity markets.
The value of the Indian rupee has continued to weaken against the US dollar, making it more expensive for foreign investors to hold Indian assets. In addition, rising US bond yields, which are now above 4.6% for the 10-year bond, have made US assets more attractive, leading to an outflow of capital from emerging markets like India.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, pointed out that with the dollar index above 109 and US bond yields offering high returns, it is logical for FPIs to shift their focus away from emerging markets, particularly India, which has one of the highest equity valuations among emerging economies.
The Broader Economic Context
The market sentiment has also been dampened by expectations of a weak earnings season in India. Analysts anticipate a slowdown in corporate profits for the current quarter, which is further weighing on investor confidence. Despite some corrections in the Indian equity markets, valuations remain relatively high, making Indian stocks less attractive to foreign investors compared to other emerging markets.
In addition to concerns about earnings, there is growing uncertainty over the pace of India’s economic recovery. While India has been one of the fastest-growing major economies, investors are cautious about the sustainability of this growth, particularly with global risks such as inflation and geopolitical tensions continuing to exert pressure.
Another significant concern is the domestic fiscal situation, with analysts pointing to rising inflation and interest rates, which could dampen economic growth and corporate profitability in the short term.
Outflow from Debt Markets
The trend of foreign withdrawals is not confined to equities alone. FPIs have also reduced their exposure to Indian debt markets, withdrawing Rs 4,848 crore from the debt general limit and Rs 6,176 crore from the debt voluntary retention route. The rising attractiveness of US bonds, which offer higher returns, has prompted foreign investors to pull back from Indian debt instruments.
Contrasting Trends: 2023 vs 2024
The dramatic outflow in January marks a stark contrast to the robust inflows seen in 2023. Foreign investors had poured in Rs 1.71 lakh crore in 2023, driven by optimism over India’s strong economic fundamentals, resilient domestic consumption, and the government’s infrastructure spending plans. In contrast, 2024 has started on a more cautious note, with net inflows into Indian equities amounting to a mere Rs 427 crore.
The year 2022 had been particularly challenging for India’s equity markets, as FPIs withdrew Rs 1.21 lakh crore amid aggressive interest rate hikes by global central banks. However, the strong inflow in 2023 had led to optimism about India’s economic prospects, and many had hoped this trend would continue into 2024.
Outlook for the Future
Despite the cautious approach by foreign investors so far in 2024, experts believe there is still potential for a rebound. Vipul Bhowar, Senior Director at Waterfield Advisors, suggested that a cyclical improvement in corporate earnings, stronger GDP growth driven by resilient domestic consumption, and increased government spending on infrastructure projects could reverse the current trend. If these factors materialize, FPI flows into India could pick up again in the latter part of the year.
Overall, the current outflow signals a period of uncertainty for Indian markets, as global factors such as rising US yields and a strengthening dollar are compounded by domestic concerns. However, with India’s long-term growth story intact, many analysts remain hopeful that the trend could turn around as the year progresses, provided the economy shows signs of resilience in the face of global challenges.
