Foreign investors have withdrawn approximately Rs 4,285 crore from Indian equities in the first three trading sessions of January 2025. This move comes amid concerns over high stock valuations and global economic headwinds. The significant capital outflow highlights the growing unease among international investors regarding the pricing of Indian stocks.
Many believe that the current valuations are overvalued relative to their earnings potential. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, stated, “FPIs are likely to continue selling as long as the dollar remains strong and US bond yields offer attractive returns. The dollar index at around 109 and the 10-year bond yield above 4.5 percent are significant deterrents to FPI flows.”
Globally, markets are experiencing turbulence due to various macroeconomic factors.
These include tightening monetary policies and geopolitical uncertainties. Analysts suggest that the recent withdrawals from the Indian equity market are part of a broader trend. Foreign institutional investors are reassessing their portfolios and seeking safer investment avenues.
This trend could have implications for the Indian market. It may lead to increased volatility and influence the overall sentiment.
Foreign investor sentiment and market impact
Himanshu Srivastava, Associate Director-Manager on Research at Morningstar Investment Research India, noted, “A depreciating rupee against the dollar has further weighed on FPI sentiment, making Indian investments less attractive due to currency risk. Additionally, the US Federal Reserve’s indication of fewer rate cuts this year has failed to lift investor confidence.
Despite the outflows, market experts advise domestic investors to maintain a long-term outlook on equity investments. They emphasize the strong fundamentals and growth potential of the Indian economy.
Experts further suggest diversification and a cautious approach to navigating the fluctuating market conditions. The ongoing trend reflects a cautious approach by foreign investors. In 2024, net inflows into Indian equities were significantly reduced.
This contrasts sharply with the extraordinary ₹1.71 lakh crore net inflows in 2023, driven by optimism over India’s strong economic fundamentals. The current situation is further juxtaposed with 2022, which saw a net outflow of ₹1.21 lakh crore. This was amid aggressive rate hikes by global central banks.
As investors closely monitor these developments, the focus will be on upcoming economic reports and policy announcements. The next few months will be crucial in determining whether Indian trade will regain its momentum or if the current slowdown signifies a more fundamental shift.
