After selling for four consecutive months, foreign portfolio investors (FPIs) bought Indian stocks worth ₹20,200 crore in July, as per NSDL data. Net-net, FPI inflow, including equities, debt, hybrid, mutual funds, alternative investment funds (AIFs), for July stood at ₹40,031 crore into the Indian financial market.
The return of FPIs to buying Indian equities was among the key factors that drove the benchmarks up in July. The Sensex and the Nifty 50 gained over 2% each in July, extending gains for the second consecutive month. The Nifty Midcap 100 also clocked a gain of nearly 2%, while the Nifty Smallcap 100 rose by 2.5% for the month.
However, till 31 July, the Nifty was down 7%, and the 30-share pack was down over 8% so far this year.
FPIs outflow from the Indian equities segment stands at ₹2,54,072 crore, while on a net-net basis, it is ₹172,841 crore till 31 July this year.
What drove the FPIs to Indian equities in July?
India’s stable macroeconomic conditions, healthy corporate earnings, stable RBI policy and rising concerns over lofty valuations of AI stocks lead foreign investors to the Indian markets.
“Healthy macroeconomic indicators, positive corporate earnings, declining inflation, stable RBI policy, and the US Federal Reserve’s decision to keep interest rates unchanged have boosted investors’ confidence. FPIs have also increased allocations in debt, supported by India’s inclusion in global bond indices,” Ravi Singh, Chief Research Officer at Master Capital Services, noted.
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, pointed out that FPIs turned heavy sellers in chip stocks last month due to concentration risks.
“In the Indian market, there is no concentration risk like in South Korea and Taiwan. Therefore, the Indian market is becoming more attractive to FPIs,” said Vijayakumar.
“The drivers of FPI buying are crude in the low 80s, four months of valuation reset against the domestic floor, deliberate sector tilts toward consumer services, metals, and healthcare, and the Asia rotation out of the unwinding chip markets,” said Harshal Dasani, Business Head at INVAsset PMS.
Can the FPI momentum sustain?
There are two key factors that will determine whether or not FPIs will continue buying Indian stocks going forward.
The first is the oil prices. The US-Iran conflict drove Brent crude above $100 per barrel briefly in July. On Monday morning, it was down near $83 per barrel after US President Donald Trump said the US and Iran were to hold talks on Monday, raising hopes of an end to their conflict, which would lead to the reopening of the Strait of Hormuz.
According to experts, if oil prices settle around $80-85 per barrel, it will be manageable for the Indian economy and corporates. However, if prices remain elevated, it will strain the Indian economy, increase inflationary risks, weaken the Indian rupee, and drag corporate earnings, which can again prompt foreign investors to shun Indian equities.
Moreover, elevated oil prices and the resulting higher inflation can push the US Federal Reserve to hike interest rates. This will strengthen the US dollar and bond yields, which can trigger an offloading of Indian equities by the FPIs.
“Big flows from FPIs are unlikely if the US bond yields remain attractive. It would be irrational to expect big FPI inflows when the risk-free return (US bond yield) from the US 10- year yield is at 4.7%,” said Vijayakumar.
“Going forward, the momentum will largely depend on global risk sentiment. Declining Middle East tensions and rising crude oil prices remain key headwinds, as higher energy costs could increase India’s current account deficit, fuel inflation, and pressure on corporate profitability,” said Singh.
Another major factor that will influence FPIs’ stance on Indian equities is AI trade.
While there has been major selling in AI-themed stocks recently due to concerns over stretched valuations, Microsoft’s and Amazon’s latest quarterly results reflected that AI demand remains strong.
The growth outlook of AI players remains strong due to increasing AI demand.
According to Ross Maxwell, Global Strategy Operations Lead at VT Market, the latest earnings indicate that the AI investment cycle is beginning to deliver tangible financial returns.
If AI companies continue delivering strong earnings growth, FPIs may view them as offering superior risk-adjusted returns, especially when earnings of Indian corporates remain soft, stretching market valuations.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
