FPIs withdraw over Rs 5,200 crore in April so far from domestic equities

Foreign investors dumped domestic equities worth over Rs 5,200 crore in April so far on concerns over tweaks in India's tax treaty with Mauritius, which would now impose higher scrutiny on investments made here via the island nation.

This came following a staggering net investment of Rs 35,098 crore in March and Rs 1,539 crore in February, data with the depositories showed.

According to the data with the depositories, Foreign Portfolio Investors (FPIs) made a net outflow of Rs 5,254 crore in Indian equities this month (till April 19).

The major trigger for FPI selling was the tweak in India's tax treaty with Mauritius, which would now impose higher scrutiny on investments made in India via the island nation, Himanshu Srivastava, Associate Director, Manager Research, Morningstar Investment Research India, said.

The two nations have reached a consensus on a protocol amending a double taxation avoidance agreement (DTAA). The protocol specifies that tax relief cannot be utilized for the indirect advantage of residents from another country. In fact, most of the investors investing through Mauritius entities into Indian markets are from other countries, he added.

Additionally, hotter-than-expected US inflation and the consequent spike in bond yield (the 10-year rising above 4.6 per cent) led to big selling in the Indian market, V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said.

Another major concern is the surcharged geopolitical situation in the Middle East with heightened tensions between Iran and Israel, he added.

Since domestic institutional investors (DIIs) are sitting on huge liquidity and the retail and high net-worth individual (HNI) investors in India are highly optimistic about the Indian market, FPI selling will be largely absorbed by domestic money.

Apart from equities, FPIs withdrew Rs 6,174 crore from the debt market during the period under review.

Before this, foreign investors invested Rs 13,602 crore in March, Rs 22,419 crore in February, and Rs 19,836 crore in January. This inflow was driven by upcoming inclusion of Indian government bonds in the JP Morgan Index.

JP Morgan Chase & Co. in September last year announced that it will add Indian government bonds to its benchmark emerging market index from June 2024.

This landmark inclusion is anticipated to benefit India by attracting around USD 20-40 billion in the subsequent 18 to 24 months.

In terms of sector, FPIs were big sellers in IT in anticipation of poor performance in the fourth quarter of FY24. Also, they were sellers in FMCG and consumer durables. However, they were buyers in autos, capital goods, telecom, financial services and power.

Overall, the total inflow for this year so far stood at Rs 5,640 crore in equities and Rs 49,682 crore in debt market.