FPIs pump Rs 1.5 trn into equity markets in 2023, trend may continue in 2024

In a dazzling resurgence, foreign investors have graced the Indian equity markets with an influx of nearly Rs 1.5 trillion in 2023, fuelled by optimism over the country's resilient economic fundamentals amid shadows of a gloomy global scenario. Experts believe that the positive trend may continue in 2024.

This follows Indian equities witnessing the worst-ever net outflow of Rs 1.21 trillion by FPIs in 2022 on aggressive rate hikes by the central banks globally after net inflows for three consecutive years.

Going forward, as the general elections approach next year, political stability and economic growth will become focal points for foreign investors. Besides, global cues on the inflation and interest rate scenario would dictate the flow of foreign money into Indian equities, said Himanshu Srivastava, Associate Director Manager Research at Morningstar Investment Research India.

India, with its promising position for economic growth, is expected to continue attracting foreign investment flows, he added.

As of now, the foreign portfolio investors (FPIs) have made a net investment of around Rs 1.5 trillion in the Indian equity markets and around Rs 60,000 crore in the debt market. Collectively, they pumped over Rs 2 trillion into the capital market, according to data available from the depositories.

Of Rs 1.5 trillion net equity market inflow, close to Rs 43,000 crore have been invested in the first two weeks of December following the enhanced political stability, owing to the BJP's success in recent elections across three significant states. If this trend persists, it could become the best year for FPI flow.

FPIs made a net infusion of Rs 25,752 crore in equities in 2021, Rs 1.7 trillion in 2020, which was the best year, and Rs 1.01 trillion in 2019.

In the year 2022, the flows from foreign investors were largely driven by factors like inflation and interest rate scenarios in developed markets, such as the US and the UK, currency movement, the trajectory of crude oil prices, geopolitical scenario and the health of the domestic economy, among others, Srivastava said.

Heightened FPI investment was triggered by the nation's resilient economic fundamentals, forward-looking policy reforms, optimistic corporate earnings outlook, global liquidity trends, and a growing recognition of India's enduring long-term growth potential, said Bharat Dhawan, Managing Partner, Mazars in India. Mazars is an international audit, tax and advisory firm.

"India is one of the top investment destinations of FPIs. There is a near consensus now in the global investing community that India has the best prospects among the emerging economies for sustained growth for many years to come," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"This growth has the potential to create phenomenal wealth through the stock market. FPIs are investing to benefit from this potential wealth creation," he added.

After pulling back for three consecutive years, foreign investors made a comeback in the debt markets as well this year, as they injected around Rs 60,000 crore in 2023 (till December 15), marking a noteworthy shift in their capital flow.

They took out funds totalling Rs 15,910 crore in 2022, Rs 10,359 crore in 2021, and Rs 1.05 trillion in 2020.

The announcement by JP Morgan Chase & Co in September that it will add Indian government bonds to its benchmark emerging market index from June next year has influenced the inflow in the country's bond markets this year, said Mayank Mehraa, smallcase Manager and Principal Partner at Craving Alpha.

This landmark inclusion, scheduled for June 2024, is expected to benefit India by attracting around $ 20-40 billion in the subsequent 18-24 months. This can make Indian bonds more accessible to foreign investors and potentially strengthen the rupee, thereby, bolstering the economy.

In terms of sectors, FPIs preferred financial, IT, pharma, and energy sectors owing to the country's strength in technology and healthcare, and commitment to sustainable development contributed to the appeal for foreign investors.

FPIs started the year on a negative note, and a departure of "hot money" was seen in the first two months when they pulled out over Rs 34,000 crore.

But, FPIs shifted gears and turned buyers in March and incessantly purchased equities till August on the resilience of the Indian economy amid an uncertain global macro backdrop. During these six months, they pumped in Rs 1.74 trillion.

However, FPIs departed from equities in September, and the negative trend continued in the succeeding month, owing to economic uncertainties in the US and Eurozone regions as well as growing concerns about global economic growth.

Additionally, higher crude prices, sticky inflation numbers, and the expectation that the interest rate may continue to remain at elevated levels longer than expected prompted foreign investors to adopt a wait-and-watch approach.

In November, FPIs again turned buyers with a net investment of Rs 9,000 crore, and the positive momentum has continued this month on the outcome of recent elections across three significant states.

Internationally, signals from the US Federal Reserve about three prospective rate cuts in the upcoming year marked a departure from the prevailing high-interest rate regime also prompted FPIs to invest.