By ITTeam In a startling development, India witnessed a 99% decline in Foreign Portfolio Investment (FPI) inflows in 2024, with net investments plunging from ₹1.71 lakh crore in 2023 to a mere ₹2,026 crore, according to data from the National Securities Depository Limited (NSDL).
Global Economic Dynamics at Play
Analysts attribute this sharp downturn primarily to the robust performance of the U.S. economy. The United States exhibited strong economic indicators, buoyant stock markets, and maintained higher interest rates throughout the year. This environment attracted substantial investments into U.S. bonds, money markets, and equities, often at the expense of emerging markets like India.
Ajay Bagga, a banking and market expert, noted, “The strong U.S. economy, U.S. stock markets, and ‘higher for longer’ U.S. interest rates meant that strong flows went into U.S. money markets, U.S. bonds, and U.S. stock market, to the detriment of emerging markets including India.”
Domestic Challenges and Market Valuations
Domestically, several factors rendered Indian markets less appealing to foreign investors. Elevated valuations, a high market capitalization-to-GDP ratio, slowing GDP growth, declining industrial output, and reduced corporate earnings growth collectively contributed to this scenario.
The general elections in 2024 further compounded the situation. The electoral process led to a slowdown in government spending and public infrastructure projects, dampening economic activity and deterring FPI inflows.
Sector-Specific Impacts
The financial services sector bore the brunt of FPI outflows. Foreign investors sold shares worth ₹61,006 crore in this sector, constituting a major part of their divestments.
Additionally, the Reserve Bank of India’s (RBI) tightening of unsecured lending rules and liquidity constraints adversely affected banks and non-banking financial companies (NBFCs). These sectors, which typically attract significant FPI interest, faced challenges that led to reduced foreign investments.
Global Capital Shifts
The year also witnessed significant capital movements influenced by global events. A stimulus package in China triggered an influx of approximately $53 billion into Chinese equities between September 24 and October 8, drawing capital away from Indian markets during this period.
Domestic Investors Provide Stability
Despite the substantial FPI outflows, the Indian stock market remained relatively stable, thanks to the increasing participation of domestic investors. Their growing presence provided a buffer against the volatility typically associated with large foreign capital movements.
Outlook for 2025
Looking ahead, the trajectory of FPI inflows into India will likely depend on a confluence of global and domestic factors. Global economic conditions, geopolitical developments, and domestic policy decisions will play pivotal roles in shaping investor sentiment.
Market experts suggest that while the current scenario poses challenges, it also offers opportunities for long-term investors, especially in sectors poised for growth. The resilience of domestic investors and potential policy reforms could pave the way for a rebound in FPI inflows in the coming years.
In conclusion, the 99% decline in FPI inflows in 2024 underscores the intricate interplay between global economic dynamics and domestic market conditions. As India navigates this complex landscape, strategic policy measures and sustained economic reforms will be crucial in attracting and retaining foreign investments.