 "FPIs")
Foreign portfolio investors (FPI) sold shares worth $3.4 billion this month — the highest in 12 months.
Disappointing results by several FPI-heavy blue-chip firms, rising US bond yields, and geopolitical uncertainty were the reasons behind the risk aversion by foreign funds.
Outflows from India were among the highest in the emerging market space.
Analysts said the disappointing December quarter earnings by megacaps such as HDFC Bank, Hindustan Unilever, and Bajaj Finance — where FPIs have substantial exposure — weighed on sentiment.
Concerns over HDFC Bank’s loan growth and net interest margin led to a 15 per cent fall in shares of HDFC Bank in just five trading sessions. FPIs with Rs 10,483 crore from equities on January 17 — the highest single-day withdrawal from the domestic markets—triggered an 8.4 per cent fall in India’s largest private sector lender.
The hardening of US Treasury yields also weighed on the sentiment and raised concerns about whether the US Federal Reserve (Fed) would lower interest rates at the same pace as the Street had priced in.
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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 the repricing of risky assets.
Some market experts said there might have been pressure on emerging market funds to book profits from India following a sharp run 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 so well in terms of results. Because of the bad results of the bellwether stock in the banking sector, there was a focused effort to reduce weighting in that particular stock," said Andrew Holland, the chief executive officer of Avendus Capital Public Markets Alternate Strategies.
The heavy selling notwithstanding, the Sensex declined by just 0.7 per cent in January, due to buying by domestic institutional investors.
Domestic mutual funds bought shares worth nearly Rs 20,000 crore.
In 2023, they bought 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 worry.
"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.
