FPI Selling Moderates as Indian Market Normalises

FPI selling

FPI investing in India can be challenging due to complex tax and regulatory laws, although recent reforms have made it easier for foreign investors.

One of the critical drivers of FPI investing in India is the country’s growth potential. India remains expected to be one of the fastest-growing major economies in the world over the next few years, with a growing middle class and a young and educated workforce. FPIs are attracted to the growth opportunities offered by Indian companies, especially in sectors such as information technology, healthcare, and consumer goods.

Another factor that makes India an attractive investment destination for FPIs is the country’s regulatory framework. In recent years, the Indian government has executed several reforms to make investing in the country easier for foreign investors. For instance, the government has relaxed FPI investment limits in several sectors and simplified the registration process for foreign investors. Despite these positives, FPI investing in India can be challenging due to the country’s complex tax and regulatory regime. 

Who are FPIs?

They are investors who invest in overseas portfolios and acquire various financial assets, including mutual funds, stocks, and fixed deposit accounts. Investing in international markets aims to diversify the portfolio and get a sizable return, but it also increases volatility and risk. In India, FPIs remain controlled by the Securities and Exchange Board of India (SEBI).

What’s Happening?

According to data from National Securities Depository Ltd, in 2023, foreign investors have reduced their selling of Indian equities in the first half of February compared to January. FPIs sold shares worth Rs 4,806 crores in the first half of February, while FPI trading in Indian stocks had advanced to a seven-month high of Rs 28,852 crore in January. 

The high selling in January was due to the reallocation of capital to China and Taiwan and uncertainties surrounding the sharp selloff in Adani Group shares following a report by Hindenburg Research that raised concerns about the conglomerate’s financials.

The moderation in FPI selling remains attributed to the normalisation of the valuation gap between India and China. As of the end of January, the Indian market’s premium to China was back in line with the 10-year average, according to Christopher Wood of Jefferies.

FPIs sold Rs 6,263 crore shares in the oil and gas sector, turning net sellers in power and metals. However, FPI selling in financials reversed the approach in February, with foreign investors determining stocks worth Rs 2,368 crores after off-loading Rs 15,204 crores in January. Information technology also noticed renewed interest from FPIs. Analysts say financials remain attractive due to their strong earnings, credit metrics, and enhancing asset grade. 

India’s benchmark Nifty50 advanced 2% in the first half of February as FPI selling pressure moderated and domestic investors persisted in supporting the markets. Domestic investors contributed 1.5 trillion rupees to Systematic Investment Plans (SIPs) in the past 12 months, easing the influence of FPI discharges of Rs 1.17 lakh crore, according to the Association for Mutual Funds in India.

What’s Next?

FPIs are showing renewed interest in financials and information technology. Furthermore, domestic investors continue to support the markets, contributing significantly to SIPs, which has cushioned the impact of FPI outflows.

FPIs can be a double-edged sword. While they can benefit a country, they can also create instability. Market shifts and volatility can occur unpredictably, causing unease. A sudden withdrawal of funds can cause economic instability and political uncertainty, making FPI even riskier. So, before diving in, remember the potential downsides and consider the risks.

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