FPI Inflow Return: Indian Markets Catch the Signal

Over the past year, Indian equity markets witnessed a significant retreat by Foreign Portfolio Investors (FPIs), coinciding with heightened global uncertainty and domestic valuation concerns. As volatility gripped global markets, FPIs turned cautious, pulling out large sums from Indian equities. Between September 2023 and February 2024, FPIs withdrew over ₹2 lakh crore cumulatively, with October (-₹94,017 crore) and January (-₹78,027 crore) seeing the steepest outflows. This sharp pullback triggered downward pressure on benchmark indices, which corrected in tandem.

FPI Outflows: What Drove the Retreat?

A mix of factors drove this retreat: rising U.S. bond yields, concerns over sticky inflation, geopolitical tensions, and profit-booking in overvalued segments of the Indian market. With Indian valuations at a premium compared to peers, FPIs found better risk-reward ratios elsewhere, particularly in markets like China and South Korea that had corrected steeply. However, the tide appears to be turning. In March, the outflows slowed dramatically to just ₹3,973 crore.

Signs of Change: A Shift in FPI Sentiment

April brought a positive surprise with net FPI inflows of ₹4,223 crore, and the trend has continued into May with ₹4,776 crore infused so far. This shift indicates a return of confidence in the Indian growth story, supported by macro stability, strong corporate earnings, and anticipation around political continuity post-elections.

Market Momentum and Sectoral Shifts

Notably, Indian markets have responded swiftly to this sentiment shift. Benchmark indices have picked up momentum over the past two months, with all major indices staging a comeback. FPIs are gradually increasing allocations to financials, infrastructure, and capital goods—sectors riding on India’s capex and consumption cycles.

What’s Next for FPI Inflows in India?

While risks remain, the reversal of FPI flows marks a potential turning point. Sustained inflows could offer much-needed support to the market’s next leg of growth, reinforcing India’s position as a resilient and attractive investment destination.

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