FPIs pump ₹1.65 lakh cr in Indian markets, equity inflows plunge 99% to ₹427 cr in 2024: What lies ahead in 2025?

India’s financial markets experienced a drastic drop of foreign portfolio investor (FPI) inflows in 2024, with net investments in Indian equities falling by 99.7 per cent compared to the previous year. According to the National Securities Depository Ltd (NSDL) data, FPI inflows in Indian equities sharply plunged to ₹427 crore in 2024 compared to ₹1.71 lakh crore in 2023.

According to D-Street experts, one of the primary reasons for this decline was the US economy’s dominance in global markets. The US economy’s strong performance, resilient stock markets, and prolonged higher interest rates directed substantial investment towards US bonds, money markets, and equities. This shift occurred at the expense of emerging markets like India.

Also Read: FPIs remain net buyers in Indian stock market in 2024, primarily through IPOs, QIPs, note Deepak Shenoy, Samir Arora

Additionally, Indian markets lost some appeal because of higher valuations, elevated market cap-to-gross domestic product (GDP) ratio, slowing GDP growth, weaker industrial output, and reduced corporate earnings growth. High consumer price index-based (CPI) inflation also hurt the purchasing power of urban India, leading to subdued demand from sectors.

FPI activity in 2024

According to NSDL data, FPIs bought ₹427 crore in Indian equities during the entire calendar year 2024, and the total inflow, taking into account debt, hybrid, debt-VRR, and equities, stands at ₹1.65 lakh crore. FPIs’ net investment in the Indian debt market stood at ₹13,000 crore during 2024.

This compares to the year-ago period’s data when FPIs bought ₹1.71 lakh crore in Indian equities and the total market inflow stood at ₹2.37 lakh crore taking into account debt, hybrid, debt-VRR, and equities FPIs’ net investment in Indian debt market stood at ₹68,663 crore during 2023.

Also Read: FPIs pump ₹22,766 crore in Indian equities; Will the inflows continue in December? Experts weigh in

Domestically, several factors further deterred FPI inflows in 2024. The general elections in 2024 led to a slowdown in government spending and public infrastructure projects, dampening the overall economic activity.

Meanwhile, the long-awaited stimulus in China caused a temporary inflow of $53 billion into Chinese stocks between September 24 and October 8. However, this development drew large capital away from Indian equities during the same period.

The underperformance of Indian banks and non-bank financial institutions also played a significant role in this trend. The Reserve Bank of India (RBI)’s tighter regulations on unsecured lending and reduced liquidity impacted these sectors, which hold considerable weight in the Indian markets. 

FPIs, traditionally overweight on financial stocks, net sold $35 billion of shares in the sector in 2024. Bank of Japan’s monetary policy changes further exacerbated the situation. Adjustments to interest rates impacted the “yen carry trade,” leading to outflows across emerging markets, including India.

Notably, FPIs took a sharp U-turn and turned net buyers on positive domestic indicators in December, snapping their robust two-month selling streak. D-Street experts believe the trend reversal is a clear strategy for foreign investors to bank on year-end profits in the Indian stock market.

Also Read: FPI inflows into Indian equities drop sharply in 2024; rebound anticipated in 2025

“The return of foreign participants to the Indian market can be attributed to various factors. On the macro front, the recent US policy announcements impact the peer countries, the geopolitical situation amongst Middle Eastern countries, well-controlled inflation, and interest rate checks,” said Manoj Purohit, Partner and leader, FS Tax, Tax and Regulatory Services, BDO India.

FPI inflows outlook for 2025

FPIs maintained some interest in India’s primary markets despite the challenges, indicating confidence in select long-term growth opportunities. Moreover, the rise of domestic investors provided a buffer for the markets, enabling FPIs to exit with minimal disruptions.

The selling spree by FIIs was seen in October, and November declined in December. There was occasional buying by FIIs in early December, but they turned sellers again, though not on a sustained basis like in October and November. An important characteristic of FII investment is that they have been consistent equity investors through the primary market.

Also Read: FPIs turn buyers in second half of November; Financial Services, IT, FMCG stocks see inflows

“This trend of selling through the exchanges and buying through the primary market is discernible in the year-long trend in 2024. Selling through exchanges is mainly due to high valuations, and investing through the primary market is mainly due to fair valuations,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

“In early 2025, FIIs may again turn sellers into equity since the dollar has been appreciating (dollar index is above 108) and the US 10-year bond yields are attractive at around 4.4 per cent. FIIs will turn buyers in India when there are indications of growth and earnings recovery,” added Dr. V K Vijayakumar.

According to analysts, the sharp decline in FPI inflows underscores the need for India to address both global and domestic challenges to sustain foreign investment and bolster domestic economic growth in the coming years.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts, consider individual risk tolerance, and conduct thorough research before making investment decisions, as market conditions can change rapidly, and individual circumstances may vary.