Foreign portfolio investors (FPI) sold shares worth $3.4 billion this month, the most since January last year when they had withdrawn $3.6 billion.
The disappointing results of several FPI-heavy blue-chip firms, rising US bond yields, and geopolitical uncertainty were seen as reasons behind the risk aversion by foreign funds. Outflows from India were among the highest in the emerging market space.
Analysts noted that the disappointing December quarter earnings of mega caps such as HDFC Bank, Hindustan Unilever, and Bajaj Finance—where FPIs have substantial exposure—affected sentiment.
The hardening of US Treasury yields also impacted sentiment and raised concerns about whether the US Federal Reserve (Fed) would lower interest rates at the same pace as the Street had expected. After settling at 3.86 per cent in December, the 10-year US bond yield rose to as much as 4.2 per cent, leading to a repricing of risky assets.
Some market experts suggested that there might have been pressure on emerging market funds to book profits from India following a sharp rise in the preceding two months.
“FPIs are probably taking money from markets like India to invest in China. It’s a cheap market. The banking sector has not performed well in terms of results. Because of the poor results of the bellwether stock in the banking sector, there was a focused effort to reduce weighting in that particular stock,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.
Despite the heavy selling, the Sensex declined by just 0.7 per cent in January, mainly due to buying by domestic institutional investors. Domestic mutual funds bought shares worth nearly Rs 20,000 crore.
In 2023, they purchased shares worth Rs 1.7 trillion, one of the highest-ever net purchases in a calendar year. Strong earnings and economic growth, hopes of the Fed ending the rate-hike cycle, and investment opportunities through block deals and other private issuances also supported the inflow tally last year.
Going forward, the union budget, the interest rate trajectory in the developed world, and whether the Chinese economy revives or not will influence FPI flows, according to analysts.
India’s strong macro environment and expected US rate cuts are strong tailwinds for the domestic market. However, India’s rich valuations may be a concern.
“Valuations are now elevated across metrics. The other concern is that the recovery has been narrow-based, with mass-consumption categories still under pressure. A renewed interest in China and an increase in long-term capital gains (LTCG) tax on equities as the government looks to mobilise resources to drive mass consumption are also potential risks,” said BNP Paribas in a recent note.
First Published: Jan 31 2024 | 7:42 PM IST