FY25 outlook positive for FPI inflows, but likely to see short-term volatility, say experts

The Foreign portfolio Investors investments into Indian securities and other financial instruments during FY24 stood at record ₹339,066 crore, as per NSDL data. While FY22 and FY23 had seen net outflows, the overseas flows into India during FY24 were at least 26% higher than ₹267,101 crore seen during FY21. 

 Out of overseas flows into India during FY24, overall flows into equities crossed the ₹2 lakh crore mark ( ₹204,169 Crore) after two consecutive years of outflows. The strong inflows helped the benchmark indices scale fresh highs, even as robust domestic flows supported the gains.

As we move into FY25, India's strong economic growth, expected decline in the US  interest rates, softening of bond yields and hence dollar index, all will remain positive for  FPI flows into Indian markets. 

The lower bond yields and lower dollar index make Emerging market investments attractive for the Foreign Portfolio Investors, while stronger bond yields and stronger dollar make EM investments less attractive for FPI. 

Also Read- FY24 Review: FPIs infused ₹2 lakh crore in Indian equities, highest since FY21; what lies ahead?

Macros remain favorable for FPI flows in FY25

India is one of the rare large economies with double-digit nominal GDP growth, double-digit corporate earnings growth, and double-digit ROE. We expect FPI flows to remain strong and would expect them to resume increasing their stake in Indian markets, said Alok Agarwal, Head Quant & Portfolio Manager, Alchemy Capital Management

FPI ownership in Indian equities at decadal lows

Over the last decade, India has been a preferred market for FPI with net inflows in 8 out of last 10 years. In the last two years, local flows have significantly overshadowed the FPI inflows and FPI ownership of India market is now close to the lowest point in last decade, said Kunal Vora, Head of India Equity Research, BNP Paribas.

Foreign Portfolio Investment (FPI) holdings in the Indian market has dropped to a decadal low of 16.6% in 2023, largely due to a selloff triggered by portfolio underperformance and a spike in US bond yields.*Alok Agarwal, Head Quant & Portfolio Manager, Alchemy Capital Management*

However despite the drop, FPI inflows in FY24 remained robust, indicating continued foreign investor confidence in the Indian market, said experts. Additionally, the emergence of retail investors in the Indian stock market has played a crucial role in counterbalancing the impact of FPI outflows, with domestic mutual funds and direct retail investors significantly increasing their free float ownership of NSE listed companies, thereby reducing the influence of FPI flows.

Also Read- Expert View: Valuations are looking expensive for the market as a whole, says BNP's Kunal Vora

High valuations add to caution

Even though FPI ownership may be at lows,  Indian markets have scaled highs and valuations of Indian markets keep experts slightly cautious.

In our recent overseas marketing trip, among the foreign investors, there was an acknowledgment of the positives about the market but there were concerns about the valuations in general and about the froth in the mid and small cap stocks, said Kunal Vora , Head of Indian Equity Research, BNP Paribas. Vohra said that we have seen an increased interest in India from investors that have not historically invested in India but we believe for large FPI inflows, valuations will need to be more supportive. 

Sunil Damania, Chief Investment Officer, MojoPMS also said that Presently, Indian market valuations no longer remain inexpensive, with trading at 30x Trailing Twelve Months (TTM) Price-to-Earnings (P/E) ratio and a market capitalization to GDP ratio exceeding 120 per cent.  Also since inflows had remained strong during FY24, historical trends suggest a potential slowdown in inflows for FY2025 following record investments by FPIs.

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