How strong Indian market: in chart?

India’s stock market has experienced a remarkable surge over the past two years, attracting investors with its robust economic growth and serving as an alternative to Chinese markets. However, recent indicators suggest that this momentum may be waning.

Indian may move without a hand of FPI

India’s dependence on Foreign Portfolio Investment (FPI) has evolved over time. Here’s a breakdown:

What is FPI?

Foreign Portfolio Investment refers to investments made by foreign investors in the financial markets of a country. This includes stocks, bonds, and other securities, but does not involve taking ownership or control of a company.

How India Depends on FPI

Capital Inflows: FPI brings foreign currency into India, boosting the availability of capital for investment in the domestic economy.
Market Liquidity: FPI increases trading activity in Indian stock markets, making them more liquid and attractive to both domestic and foreign investors.
Benchmarking: FPI investments can serve as a benchmark for the performance of Indian companies and the overall economy.
Economic Growth: Increased investment can stimulate economic growth by funding new projects and creating jobs.

Historical Context:

Pre-Liberalization (before 1991): FPI was tightly controlled, with limited access to Indian markets.
Post-Liberalization: Reforms opened up the Indian economy, leading to a significant increase in FPI inflows.
Recent Trends: FPI inflows have fluctuated based on global economic conditions and investor sentiment.

Risks and Concerns:

Volatility: FPI can be volatile, leading to sudden capital outflows that can destabilize the Indian stock market and currency.
Dependence: Over-reliance on FPI can make the Indian economy vulnerable to external shocks.
Crowding-Out Effect: FPI inflows may crowd out domestic investment, potentially hindering long-term economic development.

Mitigating Risks:

Diversification: Encouraging domestic savings and investment to reduce dependence on FPI.
Stronger Institutions: Developing a robust financial system to manage potential risks.
Regulatory Framework: Implementing appropriate regulations to monitor and manage FPI inflows.

Overall, FPI plays a significant role in the Indian economy, but it’s important to manage the associated risks and promote a balanced approach to capital inflows.

Here’s an overview of FPI activity in 2024:

Annual Investment Overview:

Sharp Decline in Equity Inflows: FPIs invested a net amount of approximately ₹427 crore in Indian equities during 2024, marking a drastic 99% decrease from the ₹1.71 lakh crore invested in 2023. LiveMint
Total Market Inflows: Considering all segments, including debt and hybrid instruments, FPIs contributed a total of ₹1.65 lakh crore to the Indian markets in 2024, down from ₹2.37 lakh crore in 2023. LiveMint

Monthly Investment Patterns:

Outflow Months: Significant FPI outflows were recorded in January, April, May, October, and November, with October witnessing a record sell-off of about $11.2 billion. Financial Times
December Recovery: December saw a reversal, with FPIs investing ₹17,045 crore into Indian equities, primarily through Initial Public Offerings (IPOs) and Qualified Institutional Placements (QIPs). LiveMint

Sectoral Investment Trends:

Financial Services: Experienced the highest outflows, with FPIs withdrawing approximately ₹54,500 crore. ICICI Direct
Oil & Gas: Saw outflows of around ₹50,000 crore. ICICI Direct
Fast-Moving Consumer Goods (FMCG): Recorded outflows totaling ₹20,000 crore. ICICI Direct

Factors Influencing FPI Behavior:

High Valuations: Elevated stock valuations led FPIs to adopt a cautious approach, resulting in reduced investments. Economic Times
Geopolitical Uncertainties: Global geopolitical tensions contributed to market volatility, affecting FPI investment decisions. Economic Times
Economic Indicators: Factors such as high inflation, slowing corporate earnings, and reduced consumer spending influenced FPI sentiment. Financial Times

Outlook for 2025:

Analysts anticipate a potential rebound in FPI inflows in 2025, driven by expectations of corporate earnings growth and favorable economic policies. However, the sustainability of FPI investments will depend on factors including global economic conditions, domestic policy decisions, and market valuations.

Economists anticipate that the slowdown may persist into 2025, with expectations of softer economic momentum. Potential easing of monetary policy and increased government spending could provide some relief, but challenges such as high borrowing costs and global economic uncertainties remain.

In summary, while India’s stock market has enjoyed significant growth in recent years, current economic indicators and foreign investment trends suggest that the “India trade” may be losing steam, warranting cautious optimism moving forward.

Disclaimer: This information is for general knowledge and should not be considered financial advice.

minhaj@tng-thenextgen.com