FPIs Stay Cautious on Indian Equities Amid Earnings Uncertainty and Global Risks

Foreign Portfolio Investors (FPIs) are expected to take a cautious approach to Indian equities until there is greater clarity on the recovery of Q3 FY25 earnings and the fair market valuations, according to a report by Shriram Mutual Funds. Despite notable market activity, FPIs have remained wary of the economic environment, particularly in light of global and domestic uncertainties.

FPI Investment Trends and Concerns

In 2024, FPI investment in Indian equities remained positive, but it saw a dramatic decline of around 99% compared to 2023. As the year ended, FPIs adopted a more cautious stance, awaiting clearer signals of economic recovery and valuation adjustments.

October 2024 saw the highest selling activity from foreign investors, with equities worth ₹91,934 crore being offloaded, as per data from the National Securities Depository Limited (NSDL). On the other hand, domestic institutional investors (DIIs) stepped in to support the market, purchasing ₹89,740 crore worth of equities during the same period.

For the entire year, DIIs bought equities amounting to ₹4.18 lakh crore, while FPIs recorded a modest net sale of ₹72 crore. This shift underscores the critical role of domestic investors in stabilizing the market, despite external challenges and foreign outflows.

Pressures on the Indian Rupee and Forex Reserves

The report also highlighted growing concerns over the Indian rupee, which depreciated to a record low of ₹85.8 per USD. This sharp decline was driven by foreign outflows triggered by China’s announcement of new stimulus measures, further exacerbating global market volatility. India’s foreign exchange reserves have also experienced a dip, falling by USD 4.112 billion in the week ending December 27, 2024, to a total of USD 640.279 billion.

Global Risks and Market Volatility

Looking ahead, the report noted that global uncertainties, particularly around the US Inauguration Day on January 20, 2025, could bring short-term market instability. The potential policy shifts under a second Trump administration, especially concerning trade and economic measures, are closely being monitored by market participants.

Additionally, disruptions in global supply chains are prompting businesses to adjust their strategies, with many opting to front-load orders in response to expected supply shortages, further adding to market volatility.

Overall, while India’s equity market remains supported by domestic investors, FPIs are likely to stay on the sidelines until clearer signals emerge regarding earnings recovery and valuation stability. The ongoing global developments will play a significant role in shaping investor sentiment in the coming months.

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