Overview of Foreign Investments in Indian Equities

Foreign investors have significantly pulled out funds from Indian equities in January, influenced by various global and domestic factors. This withdrawal follows a minor inflow experienced in December.

Drivers of Foreign Investment Withdrawal

• Global Economic Factors
  • The strength of the dollar and rising bond yields in the US have been primary drivers.
  • With the dollar index above 109 and the 10-year US bond yield above 4.6%, the conditions favor selling in emerging markets.
• Domestic Market Conditions
  • The continued depreciation in the Indian rupee has pressured foreign investors.
  • Higher valuations of Indian equities and a weak earnings season forecast have made investors wary.
  • There is uncertainty over the pace of India's economic growth.

Current Trends in Investor Behavior

•  FPIs have offloaded shares worth Rs 44,396 crore from Indian equities, a significant shift from Rs 15,446 crore investment in December. 
•  FPIs have consistently sold, except on January 2, highlighting a cautious approach. 
•  The debt market also saw withdrawals, with Rs 4,848 crore pulled from the debt general limit and Rs 6,176 crore from the debt voluntary retention route. 

Potential Turnaround Factors

• Cyclical improvement in corporate earnings.
• Stronger GDP growth driven by resilient domestic consumption and increased government spending on infrastructure.

Comparative Analysis

• 2024 saw net inflows of just Rs 427 crore, contrasting with Rs 1.71 lakh crore in 2023.
• 2022 experienced a net outflow of Rs 1.21 lakh crore due to aggressive rate hikes by central banks globally.