Ahead of the June 4 general election results, Foreign Portfolio Investors (FPIs) have aggressively sold ₹25,586 crore in Indian equities in May 2024, data with depositories showed. 

• Also read:FPIs raise short exposure on index futures as election D-day looms

With FPIs entering the event with record short positions in index futures in value terms, an election day rally cannot be ruled out on any short covering by them if Prime Minister Narendra Modi secures a comfortable third term, according to market analysts. 

FPIs have been largely selling in Indian equities this calendar year, especially in April and May. 

Data with depositories showed that May 2024 is the third month this calendar year when FPIs have been net sellers of Indian equities in the cash market. In January 2004, FPIs’ net outflows from Indian equities stood at ₹ 25,744 crore. The month of April 2024, too, saw outflows to the tune of ₹ 8,671 crore.

Taking net FPI inflows of ₹ 35,098 crore in March 2024 and February 2024 inflow count of ₹ 1,539 crore, the current calendar year has seen net equity outflows of ₹23,364 crore. 

In fact, according to a recent Nuvama report, India is the tallest country on the outflows front, alongside Canada. 

A significant chunk of FPI flows are shifting from markets with rich valuations (like India) to markets with strong companies with a presence focused on AI, Chips, and technology.

According to Nuvama research, the outperformance of China vs. India shares is likely to continue for another 20 per cent in the balance of the calendar year. For the past two months, Chinese markets have outperformed Indian peers. 

• Also read:FPIs gradually loading upon on Indian bonds in the run up to inclusion in global bond indices

K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said that FPI activity in June 2024 will be crucially influenced by the election results to be announced on June 4 and the market response. “If the election results ensure political stability, the market is likely to respond positively to that. FPIs also are likely to turn buyers in such a scenario. However, in the medium term US interest rates will exert more influence on FPI flows,” he added. 

Vijayakumar said that the main trigger for the FPI selling in May 2024 has been the outperformance of the Chinese stocks. He said the Hang Seng index boomed 8 per cent in the first half of May, triggering selling in India and buying in Chinese stocks. 

Another reason was the spike in US bond yields. Whenever the US 10-year bond yields rose above 4.5 per cent, FPIs sold in emerging markets like India and moved money to bonds. These two factors triggered the selling of equity in India. 

However, Vijayakumar believes that in the medium term, US interest rates will exert more influence on FPI flows. 

Vipul Bhowar, Director, Listed Investments, Waterfield Advisors, said that the relatively high valuations and weak earnings, particularly in the financial and IT sectors where foreign portfolio investors (FPIs) have a high allocation, along with political uncertainties such as ambiguity around the outcome of the Lok Sabha elections, global risk-off sentiment and the appeal of Chinese markets, have led to FPI selling.

“Strong GDP growth, manageable inflation, political stability and the expectation that the RBI is done tightening monetary policy create a positive outlook for the Indian economy, marking a turnaround from their net selling in May,” Bhowar added. 

Currently, Nifty50 at 22,530 (as of May 31) is about 600 points down from the all-time high of 23,110 recorded in May 2024. 

It is also important to note that the DIIs bought stocks for ₹53,618 crore in the cash market until May 30. This is around ₹10,000 crore more than the FIIs selling, according to Vijayakumar. He added that the DIIs have enough funds to buy aggressively if the situation turns favourable. 

Debt market shines

While FPIs may have been net sellers of equities in May 2024, they were net buyers of debt totalling ₹8,761 crore this month. 

FPI flows into debt this calendar year at ₹53,570 crore, positioning themselves ahead of India’s inclusion in JP Morgan’s GBI-EM on June 28.

• Also read:FPIs take out ₹22,000 crore from equities in May amid poll jitters, Chinese mkt outperformance

Official data showed that except for April 2024, when there were net outflows of ₹10,949 crore, all the months since September last year (when the JP Morgan announcement came) saw net FPI inflows into the debt market.

India is expected to receive FPI inflows of $20-25 billion in its debt market over the next 12 months due to its inclusion in two global bond indices (JP Morgan and Bloomberg).