Foreign portfolio investors (FPIs) have pulled out more than Rs 12,000 crore from Indian equities this month, impacted rising US bond yields and the uncertain environment caused the conflict between Israel and Hamas. However, data from the depositories revealed that FPIs have invested over Rs 5,700 crore in the Indian debt market during this period. The trajectory of FPI investments in India in the future will be influenced both global inflation and interest rate dynamics, as well as the developments and intensity of the Israel-Hamas conflict, according to Himanshu Srivastava, Associate Director – Manager Research at Morningstar Investment Adviser India.
Geopolitical tensions typically increase risk, which negatively affects foreign capital inflows into emerging markets like India, added Srivastava. Data from the depositories showed that FPIs sold shares worth Rs 12,146 crore in October. This followed their net selling in September, when they withdrew Rs 14,767 crore. Prior to these outflows, FPIs had been consistently buying Indian equities from March to August, with a total investment of Rs 1.74 lakh crore.
The recent outflow seems to be a response to the current global uncertainties. Geopolitical issues, particularly the conflicts in Israel and Ukraine, have cast a shadow of instability over international markets, leading FPIs to adopt a cautious approach in the Indian equity market, according to Mayank Mehraa, smallcase manager and principal partner at Craving Alpha. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, explained that the main reason for the sustained selling was the sharp increase in US bond yields, which reached a 17-year high of 5 percent on October 19th.
In the current scenario, experts believe that there could be a greater focus on safe-haven assets, such as gold and the US dollar. Vijayakumar attributed the Rs 5,700 crore inflow in the debt market to factors such as FPIs diversifying their investments amid global uncertainty and weakness in the global economy. Additionally, Indian bonds offer good yields and the rupee is expected to remain stable due to India’s stable macros. He also mentioned that this inflow could be attributed to India’s inclusion in the JP Morgan Global Bond Index.
Mehraa suggested that FPIs’ strategy of investing in debt while staying on the sidelines in the equity market reflects their response to global events. The ability to shift focus from one asset class to another highlights the dynamic nature of investment strategies in response to changing circumstances, he added. So far this year, FPIs have invested a total of Rs 1.08 lakh crore in equity and close to Rs 35,000 crore in the debt market. In terms of sectors, FPIs have been selling across financials, power, FMCG, and IT, while buying activity has been subdued in automobiles and capital goods. However, they have shown interest in the telecom sector.