FPIs return to India, but will they stay? A crucial event hangs heavy
Foreign portfolio investors (FPIs) have flocked back to Indian equities after a spate of massive selling. FPIs were buyers of Indian stocks for the third consecutive month in May, investing ₹27,000 crore in April-May, according to National Securities Depository Ltd data. But will they stay? It depends.
In June so far, FPIs have been buyers of Indian stocks worth ₹2,480 crore. However, this fund inflow momentum may face near-term turbulence.
'For the next one month, we expect FPI flows into Indian equities to remain volatile," said Shrikant Chouhan, head of equity research at Kotak Securities Ltd. So far, in June, FPI flows into emerging markets have been mixed.
Brazil, Philippines, South Korea, and Vietnam witnessed inflows of $102 million, $10 million, $1803 million, and $6 million, respectively; Indonesia, Malaysia, Taiwan, and Thailand witnessed outflows of $288 million, $68 million, $1,264 million, and $30 million, respectively, he added.
Also Read: Gold, stocks and FPIs: What the market crystal ball foretells for the next three months
Will FPIs stay?
There could be jitters among market participants as the 90-day pause period on reciprocal tariffs by the US ends on 9 July. The contours of a trade deal between India and the US are crucial and could have a bearing on the trajectory of FPI flows.
'Our base case scenario is that India and the US would reach a trade agreement within the deadline, and going by the UK-India deal, a minimum threshold of 10% is likely on merchandise exports between the US and India as well," said Gaura Sen Gupta, economist at IDFC First Bank.
Once this event is out of the way, concerns that tariff tantrum could spill over from merchandise/goods to services are likely to get allayed, given that India's economic growth is largely services-driven. 'If an incremental tariff of 10% is levied on Indian merchandise export, then we see 20 basis points negative impact on India's gross domestic product growth," she added.
Even so, since India's growth is more domestically fueled than many Asian counterparts who are more reliant on goods exports, it is likely to be relatively less affected by global trade slowdown. Further, the Reserve Bank of India's higher-than-anticipated pro-growth stance could also buoy FPI flows.
RBI cut repo rate and cash reserve ratio by a higher-than-expected 50 basis points and 100 bps, respectively, in June. Its impact on domestic consumption revival is expected to come with a lag in the second half of the year.
And that's not all. 'We see the Indian rupee getting support from RBI's interest rate cuts and liquidity boosting measures, lower oil prices and manageable fiscal deficit. In addition to equity returns, the reducing currency risk is a positive catalyst for FPI flows," said Chakri Lokapriya, chief investment officer (equities) at LGT Wealth India. 'Our analysis shows that overall FII exposure to EMs is around 30%, and from that, around 18-19% is into India; this can increase if macros remain stable," he added.
Also Read: FPI jitters: Are foreign investors losing confidence in Indian markets?
US-China truce
On the flipside, recent US-China trade truce could also lead to rotation of flows into China. Plus, India's expensive valuations could limit a huge improvement in FPI flows. At one-year forward price-to-earnings, the MSCI India is trading at a multiple of 20x, a step premium to MSCI Emerging Markets and MSCI Asia Ex-Japan indices, showed Bloomberg data.
For valuations to justify, corporate earnings have to show a meaningful and broad-based improvement. There were no fireworks in the recently concluded Q4FY25 and FY25 result season. Earnings downgrades continued on looming worries of muted urban consumption demand and margin pressures.
'While we expect FPI inflows in FY26 into Indian markets to improve from FY25 levels, a steep jump is unlikely. In a risk-off scenario, it would be difficult for emerging markets EMs including India to attract huge FPI inflows," added Sen Gupta.
Also Read: US rejects India again at WTO: Response to auto tariffs plea mirrors rejection over steel, aluminium dispute
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