FPI flows stumble on trail, edge closer to precipice

After a brutal selloff since October, foreign portfolio investor (FPI) flows for the year-to-date (YTD) in 2024 have turned negative.

In early September, YTD FPI investments peaked at a record Rs 22,000 crore ($2.6 billion).

This wave of selling has also pulled down benchmark indices, with the Nifty’s YTD returns declining to 11 per cent from their high of 21 per cent in September.

Three key factors have contributed to this shift in FPI trends: a recovery in China’s markets fuelled by Beijing’s aggressive stimulus measures, hardening US bond yields despite the Federal Reserve’s (Fed’s) shift towards rate easing, and underwhelming earnings reports from Indian companies for the July-September quarter.

“After three strong years, the economy is heading into a cyclical downturn.

"Despite this earnings slowdown, markets remain near peak valuations.

"Given the global options available to FPIs, many have exited, and this trend is likely to continue,” said Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers.

In recent months, China’s stimulus initiatives have propelled its stock markets, which were trading at less than half the valuations of India.

Consequently, some investors have shifted funds from India to China.

Recently, China’s top legislative body announced an additional $1.4 trillion stimulus package, which fell short of expectations.

Experts suggest that while China’s threat to domestic equities has lessened, the rising US dollar and Treasury yields, alongside weaker earnings, now pose a bigger headwind.

At its meeting recently, the Fed cut its policy rate by 25 basis points (bps), following a 50 bp reduction in September.

Nonetheless, the 10-year US Treasury yield has climbed from its September low of 3.6 per cent to as high as 4.49 per cent.

The narrowing rate differential between the US and India led FPIs to become net sellers of domestic debt in October — the first time since April.

The strengthening US dollar and rising yields have weighed on most emerging market currencies, including the rupee, which hit a record low of 84.4 against the dollar last week.

Rupee depreciation may deter FPI inflows in the near term.

However, over the medium term, CareEdge Ratings anticipates that FPI inflows could return as clarity emerges around US policy, potentially easing pressure on the rupee.

An analysis by JM Financial of 157 companies that have reported earnings (out of 275 under its coverage) showed that 44 per cent (69 companies) missed expectations, while 41 per cent (65 companies) exceeded them.

The remaining 15 per cent (23 companies) were in line with forecasts.

The slowdown in urban demand for fast-moving consumer goods, retail, and automotive sectors; moderation in overall demand for chemicals and consumer durables; and stress in the unsecured lending books of banks and certain non-banking financial companies have all impacted financial performance, according to the brokerage.