Green shoots: FPIs back in droves in Dec, fuelling equity and debt rally

November's decline in FAR securities inflows was influenced by the rise in US yields, the dollar's strengthening, and the "Trump trade"

Foreign portfolio investors (FPIs) have made a strong return to India’s debt and equity markets this December, partly reversing two months of consecutive outflows.

 

With US Treasury yields stabilising and softer-than-expected domestic GDP growth in Q2FY25 sparking expectations of a potential rate cut by the Reserve Bank of India on Friday, FPIs have net bought Rs 7,908 crore worth of government securities under the Fully Accessible Route (FAR) so far this month.

 

At the same time, they have significantly increased their equity holdings, investing nearly Rs 24,500 crore in Indian stocks during the first four trading sessions of December, including Rs 8,540 crore on Thursday alone. “FPIs turning buyers is a bullish signal for the market, particularly for largecap stocks,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services. 

   

This resurgence follows a sharp pullback in October and November. 

 

FPIs sold Rs 5,142 crore and Rs 5,187 crore worth of FAR securities in October and Novmber, respectively. 

 

In the same period, equity outflows totalled approximately Rs 91,983 crore in October and Rs 18,259 crore in November.

 

Analysts attribute these declines to the rise in US Treasury yields, the strengthening dollar, and the "Trump trade" that shifted investor focus to US equities, besides an underwhelming Q2 earnings season for India Inc.

 

"FPIs have come back to the market because of (softer) GDP data and in the anticipation of the Reserve Bank of India’s (RBI) monetary policy decision on Friday," said Vikas Goel, chief executive officer of PNB Gilts. The RBI’s upcoming monetary policy review is expected to maintain interest rates due to elevated retail inflation levels, despite India’s economic growth rate slowing down to 5.4 per cent in the second quarter of FY25.

 

In the debt segment altogether, despite recent volatility, FPIs injected Rs 876 crore in November, in stark contrast to the Rs 5,142 crore outflow in October, which witnessed the first net monthly outflow from FAR securities since April this year.

 

“We could see some stability in December,” said a treasury head at a private bank, noting that US yields have stabilised after surging to 4.40 per cent following Donald Trump’s victory in the US presidential election.  Market participants noted that December is typically a quiet period as books are closed.

 

Looking ahead, inflows into Indian markets are expected to rise next year, particularly with India’s inclusion in the Bloomberg Index in January 2025 and a repo rate cut anticipated in February. The inclusion of Indian bonds in the Bloomberg Emerging Market Local Currency Government Index is seen as a key driver of foreign inflows, complementing India’s recent inclusion in JP Morgan’s indices.

 

“The US yields have relatively stabilised compared to the previous month, and I believe FPIs will return to the debt market. We also have index inclusion in January,” said a dealer at a state-owned bank.

 

Since the inclusion of Indian bonds in the JP Morgan Government Bond Index–Emerging Market (GBI-EM) on June 28 this year, FAR securities have received a net inflow of Rs 56,498 crore.

 

The phased inclusion process will gradually assign Indian government bonds a 10 per cent weight in the GBI-EM index, further solidifying India’s status as a key investment destination.

 

Of the 38 bonds under the Fully Accessible Route, only 27 meet the eligibility criteria for the JP Morgan bond index, which mandates a face value of over $1 billion and a remaining maturity of more than 2.5 years. The inclusion process will unfold over 10 months, with a 1 per cent weight added each month, culminating in a 10 per cent total weight by March 31, 2025.

 

FPI investment in FAR securities has surged, doubling to exceed the Rs 2 trillion mark within just nine months of JP Morgan's announcement in September 2023 to include Indian debt in its index. The investment in FAR securities exceeded Rs 1 trillion on October 16, 2023.

   

Inputs from Sundar Sethuraman in Mumbai