Foreign Investors’ Return to Indian Equities Signals Renewed Global Confidence

Foreign investors have staged a robust comeback to Indian equities, injecting a net investment of Rs 22,766 crore in the first two weeks of December. This dramatic shift comes after consecutive months of record-breaking outflows, including a staggering Rs 94,017 crore outflow in October and Rs 21,612 crore in November, signaling a possible shift in global investor sentiment.

The turnaround in FPIs is attributed to growing optimism over a potential rate cut by the US Federal Reserve. This expectation has created a favorable environment for emerging markets like India, where global liquidity and easing monetary policies play pivotal roles in attracting foreign capital.

Volatility in Foreign Portfolio Investment Trends Marks a Pivotal Year

This year has been a rollercoaster for FPI trends. In September, FPI inflows surged to a nine-month high of Rs 57,724 crore, only to be followed by massive sell-offs in October and November. With December’s inflows, net FPI investment for 2024 stands at Rs 7,747 crore, according to depository data.

Himanshu Srivastava, Associate Director at Morningstar Investment Research India, highlighted that foreign investors’ return to Indian equities hinges on several factors, including global inflation trends, interest rate policies, and geopolitical stability. Additionally, the financial health of Indian companies and the nation’s economic growth trajectory are expected to play crucial roles in sustaining foreign inflows.

Key Drivers Behind December’s Turnaround

1. US Federal Reserve’s Rate Expectations
   The anticipation of a rate cut by the Federal Reserve has been a game-changer. A shift toward monetary easing improves global liquidity, driving capital toward growth markets such as India.”Foreigners return to Indian equities reflects a sustained interest in India as a high-growth market,” said Karthick Jonagadla, Founder of Quantace Research.
2. Improved Domestic Liquidity
   The Reserve Bank of India (RBI) has supported this momentum by lowering the Cash Reserve Ratio (CRR), enhancing liquidity, and boosting investor confidence.Furthermore, India’s Consumer Price Index (CPI) inflation dropped to 5.48% in November, down from 6.21% in October, signaling economic stability and strengthening hopes for future rate cuts.
3. Sector-Specific Investments
   FPIs invested Rs 4,814 crore in the debt general limit, while pulling out Rs 666 crore from the Debt Voluntary Retention Route (VRR) during this period.

Challenges on the Horizon

While the December inflows are promising, market experts remain cautious. Indian equities’ relatively high valuations compared to global counterparts could limit further FPI participation at elevated levels.

“The rising dollar and premium Indian valuations might prompt FPIs to turn sellers at higher levels,” noted V K Vijayakumar, Chief Strategist at Geojit Financial Services.

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