FPI fund flow into markets may slow down in near term

FPIs were net sellers in six out of seven trading sessions this month. After net sales of almost ₹4,400 crore ($349.25 million) of equity until 8 December, FPIs net sold ₹158 crore on Friday. Benchmark indices Nifty and the Sensex dropped 0.61% and 0.62%, respectively.

US services and jobs data for November came in above estimates, fuelling concerns that the US Fed may raise rates steeper than estimated at its meeting next week and trigger a worldwide recession. FPI selling is also attributed to Indian markets’ premium valuations and profit-booking at the end of the year. Analysts say that easing China restrictions and cheaper valuations could divert flows from India to countries such as China and South Korea.

“After the relaxation of covid restrictions in China, capital flows have increased to China, particularly since the Chinese market has become very cheap,” said Geojit Financial Services chief investment strategist V.K. Vijayakumar. “Compared to India, other markets like South Korea are also much cheaper. This means that there is some money moving to these markets,” he said.

According to Deepak Jasani, head of retail research at HDFC Securities Ltd, premium valuations of domestic markets and profit booking before year-end are also leading to FPI outflows. Jasani also believes that some of the flows could be diverted to China. FPI activity may remain subdued through December due to the holiday season, he said.

FPI activity typically remains subdued after 15 December, said Ambareesh Baliga, an independent market expert. Domestic flows, however, may continue providing support to markets, thanks to funds flowing into systematic investment plans, or SIPs.

Notably, equity markets continue to be supported by domestic institutional investors (DIIs) who remain net buyers in six out of seven trading sessions. DIIs net bought ₹502 crore worth of equities on Friday.

SIP flows have also been at record highs. Citing Amfi data for November, Akhil Chaturvedi, chief business officer of Motilal Oswal Asset Management Co., said that monthly SIP contribution remaining above ₹13,000 crore indicates better awareness among retail investors about the long-term orientation of equity investments and wealth creation opportunities from India’s growth trajectory.

Foreign net buying will resume if the Indian economy remains resilient amid global problems, said experts. Lower inflation and strong corporate earnings would also attract FPIs to India.

Srikanth Subramanian, chief executive of Kotak Cherry, said it is “early” to take a call on the reversal of FPI outflows. Indian markets have hit record-high levels, and we might see some money being taken off the shelf by FPIs, considering December tends to be a lean month, he added.

The impact of FPI selling on the rupee has been offset by a stable dollar index and lower crude prices. The rupee rose 0.14% on Friday on a weak dollar and a decline in crude oil prices. Anuj Choudhary, a research analyst at Sharekhan by BNP Paribas, said that weak domestic markets and FII outflows capped sharp gains.