India to see record FPI inflows in FY24 on strong economic growth

The current fiscal year FY24 is set to end with record net inflows from Foreign Portfolio Investors (FPIs) into the Indian market, with net investments close to ₹12,000 crore ($1.4 billion) in March first week, after a tepid show in January and February.

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After two years of net outflows, inflows this fiscal year have crossed $36.6 billion and are set for a record close if the momentum holds up for the rest of the month. The previous high was in FY21 when FPIs injected $36.2 billion into the Indian markets.

Of the total so far, $22.5 billion has been in equities and $13.4 billion in debt

The third quarter GDP growth of 8.4 per cent has come as a shot in the arm, putting India right back on the radar of foreign investors. In February, they purchased a modest ₹1,539 crore, while in January they were net sellers.

Foreign brokers, who sell India to their overseas clients, are bullish on the long term growth of the economy. Calling it a ‘breakout moment,’ Barclays said that India is set to remain the fastest growing economy for some time. It expects post the General Elections policy tilt to be towards faster economic expansion. In its analysis, Barclays has said that India has the potential to grow at 8 per cent without necessarily losing economic balance.

“……we found that, with some policy push and improvements in the efficient utilisation of labour, capital, export share and productivity, India can mobilise domestic resources well enough to grow around 8% consistently,” it said.

GDP push

On March 1, a day after Q3 GDP and growth estimates were released FPIs pumped in ₹4,201 crore in Indian equities, signalling their keenness in not missing out on the gains from the ongoing rally. Both Sensex and Nifty50 have hit record highs this past week.

On the debt side, FPIs have infused ₹3,316 crore in the first week of March and $5.5 billion in sovereign debt from the beginning of calendar year.

There are three reasons for the renewed FPI interest in India, according to K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

First, the Indian market is showing great resilience, and every dip is getting bought. FPIs have been forced to buy the same shares that they sold at higher prices, which is a losing game. Second, US bond yields have been steadily declining ( the 10-year yield has declined from above 4.3 per cent to 4.08 per cent now) and this has halted the switch from equity to bonds. The FPI strategy of selling equity in emerging markets to buy US bonds has stopped and third, the Indian economy is growing at better-than-expected rates (FY24 GDP growth is likely to be around 7.6 per cent, far ahead of other large economies) and this will have positive impact on corporate earnings and consequently on the stock market.

He cautioned that valuations in the mid- and small-cap segments were “excessive and unjustified,” and correction was only a matter of time.

Market stability

The main attraction of the Indian markets is the stability that it offers compared to the volatility that other economies are facing.

“The Indian economy continues to be a ‘star performing’ economy as against other emerging markets, said Axis Securities in a recent note.

Also read: FPIs maintain faith in Indian debt, inject ₹16,559 crore in Feb 1-16 despite equity sell-off

It pointed out that the macroeconomic scenario had changed in favour of the equity market in the last one to two months and multiple indicators were now indicating a positive start for 2024. “The bolstered balance sheet strength of corporate India and the significantly enhanced health of the Indian banking system are additional positive factors that, we believe, will facilitate Indian equities in achieving double-digit returns over the next 2-3 years,” it said.

This will be supported by robust double-digit earnings growth.

Kedar Kadam, Director – Listed Investments, Waterfield Advisors, a wealth advisory firm, said the strong FPI inflows during March 2024 were driven by the Q3 FY24 GDP numbers which came in sharply higher at 8.4 per cent.

This is substantially better than the consensus estimates of 6.7 per cent GDP growth and even the most optimistic estimate of 7.2 per cent, Kadam added.

Manoj Purohit, Partner and leader – FS Tax, Tax and Regulatory Services, BDO India, said that FPI inflows in March 2024 have shown a positive trend as compared to the previous month. This is thanks to the recent announcement of Q3 GDP numbers at 8.4 per cent and persistence performance of large Indian corporates. These are major factors for turning the tide green for the Indian equity market, he said.