Foreign investors have withdrawn approximately Rs 9,800 crore from Indian equities during the current month, primarily due to the sustained increase in US bond yields and the ongoing uncertainty related to the Israel-Hamas conflict. This move follows the shift of Foreign Portfolio Investors (FPIs) from being net buyers in September to net sellers, with a withdrawal of Rs 14,767 crore.
Prior to this recent outflow, FPIs had been consistently acquiring Indian equities for the preceding six months, from March to August, infusing a total of Rs 1.74 lakh crore into the market. The surge in inflow during this period was largely attributed to the decrease in US inflation, dropping from 6 percent in February to 3.2 percent in July. The temporary pause in US Federal rate hikes from May to August also contributed to this influx, as noted by Kislay Upadhyay, smallcase manager and Founder of FidelFolio Investments.
The future course of FPI investments in India will be influenced not only by global inflation and interest rate dynamics but also by the evolving situation and intensity of the Israel-Hamas conflict, as emphasized by Himanshu Srivastava, Associate Director – Manager Research at Morningstar Investment Adviser India. Geopolitical tensions, as seen in this conflict, typically heighten risk and deter foreign capital inflows into emerging markets like India.
Data from depositories reveals that Foreign Portfolio Investors (FPIs) divested shares worth Rs 9,784 crore in India during this month, up to October 13. This recent trend indicates that FPIs are taking a cautious approach to investing in emerging markets like India.
The sustained increase in US bond yields was the primary reason behind FPI selling, according to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Additionally, the ongoing uncertain environment stemming from the Israel-Hamas conflict, which has escalated geopolitical tensions in the Middle East, also played a substantial role in FPIs’ decision to divest, as highlighted by Morningstar’s Srivastava.
This situation has raised concerns about potential disruptions in oil-related activities, which could lead to an inflationary shock. FPIs appear to be preparing for this possibility, as noted by smallcase’s Upadhyay. With Israel gearing up for a potentially prolonged conflict, FPIs see this as an opportune time to secure profits and adopt a more risk-averse approach after months of exuberance.
In the present scenario, experts believe there may be a heightened focus on safe-haven assets, such as gold and the US dollar.
Conversely, FPIs have invested Rs 4,000 crore in the Indian debt market during this review period. This brings their total investment in equity to Rs 1.1 lakh crore, and they have invested over Rs 33,000 crore in the debt market thus far this year.
Regarding sectors, FPIs continued to divest in financials, power, and IT, while showing continued interest in capital goods and automobiles.