Foreign Investors Withdraw Record ₹94,000 Crore from Indian Equities in October on Attractive Chinese Valuations
Foreign Portfolio Investors (FPIs) made a historic exit from Indian equities in October 2024, withdrawing ₹94,000 crore (approximately $11.2 billion) from the stock market. This large-scale withdrawal is the most significant monthly outflow in Indian stock market history, driven primarily by high valuations of Indian equities and the allure of more attractively valued Chinese stocks.
Before this, the previous highest outflow occurred in March 2020, when FPIs withdrew ₹61,973 crore at the onset of the COVID-19 pandemic. October’s withdrawal comes in stark contrast to September’s high FPI inflow of ₹57,724 crore, a nine-month peak, which had offered optimism for sustained foreign investments in India. However, the significant reversal in October reflects shifting global investment preferences influenced by valuations and macroeconomic factors.
FPI Investment Trends in 2024: A Rollercoaster Year
FPIs have shown fluctuating investment patterns throughout 2024. Starting the year cautiously, they were net sellers in January, April, and May. However, June marked a turning point, with FPIs returning as net buyers and showing confidence in Indian equities, driven by stable domestic economic indicators and corporate earnings. This buying trend continued through September, supported by the country’s economic growth prospects and investor sentiment around India’s rising global profile as an investment destination.
October’s large outflow has disrupted this trend, significantly reducing FPI net investments in Indian equities for the year. As of the end of October, total FPI investments in Indian equities for 2024 stand at ₹6,593 crore, underscoring the impact of recent selling pressure. According to data, FPIs were net sellers almost every day in October, contributing to an 8% drop in India’s benchmark indices from their peak levels.
Drivers Behind October’s Record Outflows
A combination of factors has contributed to October’s record-breaking FPI outflows, with elevated valuations of Indian equities playing a central role. As Indian stocks reached higher valuations, many investors perceived limited room for further price appreciation, prompting some FPIs to shift their capital toward markets with potentially higher returns. China, with its relatively lower equity valuations, emerged as an appealing alternative.
The attraction of Chinese markets was bolstered by a series of stimulus measures aimed at reviving economic growth. These stimulus packages, combined with lower stock prices, created a favorable environment for foreign investors. Himanshu Srivastava, Associate Director of Manager Research at Morningstar Investment Research India, highlighted that China’s stimulus measures made its equities increasingly attractive, prompting investors to rebalance their portfolios away from high-valuation markets like India.
Geopolitical dynamics also played a role in shaping investment flows, with China’s economy showing signs of resilience amid global uncertainties. Additionally, global investors are keenly watching the trajectory of the Chinese economy, which has shown signs of recovery. This optimism around China’s growth potential, along with lower valuations, has diverted substantial FPI attention from India to China.
Domestic Factors and FPI Concerns in the Indian Market
While global factors influenced October’s outflows, domestic economic indicators also weighed on investor sentiment. India’s stock market saw a rally through much of 2024, resulting in elevated valuations that became increasingly difficult to justify for some FPIs. As valuations climbed, concerns emerged over inflationary pressures, the sustainability of corporate earnings growth, and the overall impact of festive season demand on economic indicators. For foreign investors, these factors warranted a reassessment of their Indian equity positions, leading to some caution in reinvesting heavily.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted that while FPIs sold heavily in October, domestic institutional investors (DIIs) and high-net-worth individuals (HNIs) absorbed much of this selling, particularly in the resilient financial sector. Despite the high FPI outflows, domestic investors were able to stabilize certain segments of the market, with financial stocks remaining relatively resilient due to fair valuations and consistent demand from DIIs and HNIs. This resilience reflects the strength of domestic participation in Indian markets, even amid foreign outflows.
Debt Market Activity: A Contrasting Investment Pattern
While FPIs were net sellers in equities, their activity in India’s debt market remained relatively steady. During the period under review, FPIs withdrew ₹4,406 crore from the general debt limit but invested ₹100 crore through the debt Voluntary Retention Route (VRR). Year-to-date, FPIs have invested ₹1.06 lakh crore in India’s debt market, reflecting a preference for stable income assets amid global interest rate fluctuations and a volatile equity environment. The VRR, which requires a commitment from FPIs to retain their debt investments in India for a specified period, has helped stabilize FPI flows into the debt market despite the volatile equity investment landscape.
Looking Forward: Factors Shaping FPI Flows in India
The outlook for FPI investments in India hinges on both global and domestic factors. Internationally, geopolitical developments, interest rate changes, and China’s economic trajectory are key factors that could influence FPI sentiment. Additionally, the outcome of the U.S. Presidential election is expected to impact global markets, potentially leading to shifts in FPI allocations depending on the policy landscape in 2025.
Domestically, inflation trends, corporate earnings performance, and consumer demand during the festive season will be closely monitored by FPIs as they weigh potential reinvestment in Indian equities. While India’s economic fundamentals remain relatively strong, valuations will continue to be a deciding factor for foreign investors.
A Testing Time for Indian Markets
October’s record outflows highlight the delicate balance that FPIs must maintain between attractive valuations and potential growth prospects. For India, the October FPI withdrawal has brought attention to the challenges of sustaining foreign investor interest in an environment of elevated valuations. Although India has enjoyed steady FPI inflows for most of 2024, October’s outflows serve as a reminder of the importance of valuations and growth potential in shaping investor sentiment.
With both domestic and global uncertainties on the horizon, the Indian market will need to navigate these challenges while maintaining the economic momentum that has attracted investors in the past. While the recent outflows may pose challenges for India’s equity market, the underlying resilience of domestic investors provides a stabilizing force. As FPIs reassess their positions, India’s attractiveness as a growth market remains intact, but the journey ahead will require addressing valuation concerns and staying competitive amid the rising appeal of other markets like China.