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Business News/ Markets / Stock Markets/  Explained: Why is Indian market breaking record highs in May despite FPI outflows?

Explained: Why is Indian market breaking record highs in May despite FPI outflows?

Foreign Portfolio Investors (FPIs) offload Indian shares due to various factors, while domestic investors maintain market strength. FPIs withdrew ₹35,527 crore in May, but DIIs invested ₹41,720 crore, leading to record highs for Nifty 50 and Sensex multiple times in the month.

FPIs have been reallocating their funds to Chinese markets due to attractive valuations. (Pixabay)Premium
FPIs have been reallocating their funds to Chinese markets due to attractive valuations. (Pixabay)

In the last couple of months, Foreign Portfolio Investors (FPIs) have been steadily divesting from Indian stock markets, with withdrawals totaling over 35,000 crore in May so far. 

This move is attributed to multiple factors, including high valuations in the Indian market, a shift in investment focus towards China and Hong Kong due to their comparatively lower valuations, delays in anticipated interest rate cuts by the US Federal Reserve, rising US bond yields, heightened tensions in the Middle East, and the strength of the US dollar.

Despite these significant outflows, the Indian stock market has displayed remarkable strength and resilience. This resilience can be attributed to the robust participation of Domestic Institutional Investors (DIIs) and retail investors, who have provided substantial support amid the predominant selling pressure. 

Also Read: FPIs continue to dump financials, IT, FMCG shares in May. What lies ahead?

Their active involvement has laid a solid foundation for the market, effectively countering the impact of the substantial FPI withdrawals. Media reports indicate that FPIs were net sellers for most of May, withdrawing 35,527 crore from the Indian stock market.

Conversely, DIIs countered this trend by investing even more, with 41,720 crore injected during the same period. This influx led the benchmark indices, Nifty 50 and Sensex, to touch record highs multiple times in May.

In the previous session, the Nifty 50 reached a record high of 23,100 points, marking the fourth time it set a new record. Similarly, the Sensex registered a new lifetime high of 76,009 points, achieving record highs three times in May.

Domestic investors narrow the ownership gap with foreign institutions

The Indian household sector plays a vital role in the country's economy, contributing significantly to the overall gross domestic savings. 

Traditionally, Indians have favored bank deposits for saving their earnings, valuing the perceived safety and stability they offer over the perceived volatility and complexity of the stock market.

However, recent trends indicate a notable shift, especially among young investors, who are increasingly willing to embrace some level of risk by venturing into the stock market and expanding their investment portfolios beyond conventional assets. 

Also Read: Is the Indian stock market fairly valued or overvalued? Experts weigh in

This shift in attitude is reflected in the record number of 32 million demat accounts opened in FY24, along with positive inflows into mutual funds for the 38th consecutive month in April, with the number of SIP accounts hitting a new high of 8,70,11,401 in April.

This trend has led to a substantial transformation in the ownership landscape of Indian equities, marked by a significant narrowing of the gap between foreign and domestic institutional investors. 

FIIs have notably scaled back their exposure to Indian equities, resulting in a decline in foreign investor holdings in NSE-listed companies to an 11-year low of 17.7% during the March quarter.

Also Read: Savings flowing into equity: Not a pandemic blip but a basic shift

Conversely, domestic investor holdings surged to 16.1%, indicating a remarkable shift in ownership dynamics. At the end of the March quarter, the difference between FII and DII ownership of Indian equities stood at 1.6%, compared to a 10.3% gap recorded in March 2015. 

This data, cited from PrimeInfobase by CNBC TV18, underscores the growing confidence and participation of domestic investors in the Indian stock market.

Reallocation of funds

FPIs have been reallocating their funds to Chinese markets due to attractive valuations. Chinese tech stocks, in particular, are drawing more investors, buoyed by an earnings season featuring better profits, increased buybacks, and dividends.

Analysts have revised the Hang Seng Tech index’s forward-earnings estimates to a three-year high following stronger-than-expected profits from Tencent and other major players. 

These results, coupled with the easing of Beijing’s prolonged regulatory crackdown, indicate that shares of Chinese tech firms may have reached their lowest point.

Also Read: Heatwave fuels earnings optimism in India’s stock market. THESE stocks see boost

This optimism has already attracted some investors back to the sector, pushing the Hang Seng Tech up by 33% since the end of January. Despite this rise, the index tracking China’s leading tech firms is trading at less than 17 times forward-earnings estimates, significantly below its five-year average of 26 times, Bloomberg reported. 

On the domestic front, election-related uncertainties are also contributing to FII selling.


Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 28 May 2024, 02:07 PM IST
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