Indian stock markets continued to garner strong interest from foreign portfolio investors (FPIs) so far in the current financial year 2024-25 (FY25), driven by improving macroeconomic conditions, declining inflation, and a significant rate cut by the US Federal Reserve. 

FPIs poured in ₹89,717 crore in Indian equities during the first half of the financial year (H1FY25), extending their buying spree, following a record ₹2 lakh crore inflows in the previous financial year (FY24).

September 2024 was a particularly strong month for FPI inflows, with investments worth ₹57,724 crore—marking the highest monthly inflow since December 2023, when FPIs invested ₹66,135 crore into Indian equities. This surge can be largely attributed to the Fed’s aggressive interest rate cut, which made Indian assets more attractive.

While positive factors for the Indian stock market have sustained FPI interest, ongoing geopolitical tensions may dampen this sentiment.

FPI Trends in 2024

Despite the strong inflows, FPIs have shown some fluctuations in their buying patterns over the course of 2024. Out of the nine months in 2024 (year-to-date), FPIs were net sellers in four months and buyers in the remaining five, with total inflows of ₹94,183 crore so far.

The year began on a negative note, with FPIs selling Indian equities worth ₹25,744 crore in January. It was followed by a turnaround, with FPIs becoming net buyers in February and March to the tune of ₹1,539 crore and ₹35,098 crore, respectively. However, ahead of India’s 2024 general elections, FPIs turned cautious, selling equities worth ₹8,671 crore in April and ₹25,586 crore in May.

The turning point came in June, following the widely-anticipated victory of the incumbent government, led by Prime Minister Narendra Modi. Since then, FPIs have been net buyers for four consecutive months, with inflows of ₹26,565 crore in June, ₹32,365 crore in July, ₹7,320 crore in August, and a massive ₹57,724 crore in September.

However, a volatile geopolitical situation could put a dampener on this trend. Just one session into October, FPIs have pulled out ₹6,427 crore from Indian equities amid escalating tensions between Iran and Israel.

FPIs in the Debt Market

FPIs have also shown increased interest in the Indian debt market. For the second consecutive year, FPIs have become net buyers of Indian debt, with inflows of ₹1.1 lakh crore in 2024 so far, surpassing ₹68,663 crore invested in 2023. In H1FY24 alone, FPIs bought Indian debt worth ₹54,389 crore.

September saw positive FPI inflows in debt markets for the fifth straight month, with ₹1,299 crore entering the segment. April was the only month to witness outflows in the debt market, wherein FPIs withdrew ₹10,949 crore. 

In total, FPI inflows into Indian equities and debt amount to ₹2.53 lakh crore on a year-to-date (YTD) basis.

Will the FPI Trend Continue?

Experts remain cautiously optimistic about the future of FPI inflows into Indian markets.

Aamar Deo Singh, Senior Vice President of Research at Angel One, believes that FPI inflows could cross the ₹1 lakh crore mark for the year. However, he also highlights several factors that could influence this trend, including global reactions to the US rate cut, inflationary pressures in India, recession fears in the US, and valuation concerns in Indian markets.

Krishnan VR, Chief of the Quantitative Research team at Marcellus, notes that while FPI flows tend to be sensitive to the difference between Indian and US government bond yields, the recent guidance from the US Federal Reserve for a lower fed funds rate could reduce the risk of outflows. However, India’s relatively high valuations compared to other emerging markets could limit the scope for further inflows, he added.

Sushant Bhansali, CEO of Ambit Asset Management, points out that foreign investors are closely assessing India’s valuations compared to other global markets. While FPIs have been booking profits due to India’s outperformance, the rising weight of India in global benchmark indices suggests that this trend may not last long.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, observed that there has been a significant trend of large inflows into the Hong Kong market, which emerged as the star performer in September with the Hang Seng index surging by an impressive 14 per cent. He noted that the monetary and fiscal stimulus measures being implemented by China are likely to boost the Chinese economy and stocks listed in the Hong Kong market. Vijayakumar further added that if Hang Seng’s outperformance persists, it is possible that more funds will be directed to Hong Kong, given its attractive valuation.

Despite challenges such as geopolitical tensions and valuation concerns, FPIs have continued to pour money into Indian equities and debt markets in FY25, building on the momentum from FY24. While global macroeconomic factors and market valuations may pose headwinds, experts believe that India’s rising prominence in global indices and favourable economic conditions could sustain FPI interest in the near future. However, investors should remain mindful of the risks associated with changing global dynamics and geopolitical uncertainties.