The Big Selloff: Analyzing the 10-Year Low in FPI Holdings in India

India’s economy has demonstrated remarkable resilience amidst global uncertainties, with strong growth projections and robust fundamentals. However, this positive outlook has been overshadowed by a puzzling decline in foreign portfolio investor (FPI) holdings in Indian equities. FPI holdings have plummeted to a decade-low of 16.6% in November 2023, raising concerns about investor sentiment and the attractiveness of the Indian market.

  • FPI Holdings at a Decade Low: As of November 2023, the aggregate holdings of FPIs in Indian stocks have decreased to ₹54.5 trillion, representing only 16.6% of overall Indian equities. This is the lowest level since 2012​​​​​​.
  • FPI Withdrawal in FY23: FPIs withdrew Rs 37,631 crores (about $4.5 billion) from Indian equities during the last fiscal year​​.
  • Sector-wise Movement:
    • Finance Sector: FPIs reduced their stake in Indian banks by nearly Rs 30,000 crores ($3.61 billion) in FY23​​.
    • Industrials and Small-Midcaps: FPIs have shown increased buying in industrials and small-midcap holdings​​​​.
    • Power, Construction, IT, and Financials: Notable selling was observed in these sectors in the first half of October 2023​.
  • Selloff Triggered by Various Factors: The selloff by FPIs has been primarily triggered by the underperformance of their preferred stocks and the outperformance in sectors they least preferred. Small and midcap stocks have rallied by over 40% in 2023, while large caps have not seen much movement. This disparity in performance has contributed significantly to the FPI selloff​​.
  • Impact of US Treasury Yields: A significant factor in the selloff has been the spike in US Treasury yields, which breached 4% post-September 2023. This development spooked capital markets globally and led to a reorientation of FPI portfolios, which included selling off high-quality, relatively expensive financial stocks and buying more in industrials​​​​.
  • Overall FPI Inflows Remain Strong: Despite the recent sell-off, the overall FPI inflow for 2023 has been robust at $12 billion. This indicates that foreign investors still maintain confidence in the Indian market, particularly when compared to other emerging markets where FPIs have been net sellers or only marginally active​​.
  • Domestic Institutional Investment: Domestic Institutional Investors (DIIs) have been actively investing in Indian equities, with overall domestic institutional flows reaching $20 billion in 2023. Mutual funds have been particularly active, with net inflows of $17 billion, showcasing a strong domestic confidence in the Indian market​​.
  • Retail Investors’ Confidence: Despite market volatility, Systematic Investment Plan (SIP) inflows have been rising steadily, exceeding $2 billion per month. This shows the long-term confidence of retail investors in the Indian equities market​​.
  • Outlook and Potential Reversal: The current situation is somewhat ironic given the favorable fundamentals of the Indian economy. However, there is potential for a reversal in FPI holdings as fears regarding yield spikes recede and valuations become more reasonable. Monitoring election-related uncertainty, which could add volatility to near-term flows, is crucial​.

The recovery of FPI inflows into India will depend on the resolution of global macroeconomic headwinds and the restoration of investor confidence. India’s economic performance and the government’s policy measures will also play a crucial role in attracting foreign investors.The decline in FPI holdings in Indian equities is a cause for concern, but it should not overshadow India’s strong economic fundamentals.

The Indian government should continue to focus on fiscal consolidation, infrastructure development, and policy reforms to maintain investor confidence and attract foreign capital. As global uncertainties recede and India’s economic growth strengthens, FPI inflows are likely to rebound, reaffirming the attractiveness of the Indian market.



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