In October 2024, Foreign Portfolio Investments recorded their highest-ever monthly withdrawal of ₹ 94,000 crores (around USD 11.2 billion), October, becoming the worst-ever month for funds outflows. The main cause was the valuation of domestic equities and driven Chinese stocks. October outflows of funds have surpassed the withdrawals of ₹ 61,973 crores from equities during the time of the COVID-19 pandemic. The latest outflow record came after a nine-month high investment of ₹57,724 crore in September 2024. The magnitude of net outflows is evident from the fact that FPIs were net sellers on every trading day of the month except one, reducing their cumulative investment in Indian markets for 2024 to ₹6,593 crore.

Affected Sectors

The financial and technical sectors have seen a major decline due to their heavy reliance on FPI investments. Banking Stocks witnessed higher volatility because of rising inflation and interest rates.
Sectors like FMCG and pharmaceuticals showed relative resilience due to strong domestic consumption patterns and consistent demand. These sectors were less impacted by FPI outflows, supported by their defensive nature and steady earnings performance.
The IT sector saw declines due to declining global demand and rising U.S. Treasury yields driving away foreign funds.

Reasons

Global Factors – Valuations done by the Chinese stock market and economic boosters given by China prompted fund shifts. Geopolitical tensions, including conflicts in the Middle East, and unpredictability related to U.S. presidential elections were other major reasons for investor caution.

Inflation Trajectory—Inflation in India was 8% in April, urging the RBI to hike the repo rate by 90 basis points (4.90%). This led to a sharp decline in India’s BSE and Nifty 50 stock exchanges, causing investors to withdraw money.

Impact of Festive Season Demand – Festive season demand often sees higher participation from domestic investors, boosted by strong consumption patterns and optimism. This reduces the relative dominance of FPIs in the market, making it a favourable time for them to exit or rebalance their portfolios.

Increasing Value of US Dollars ($) – Another reason for large FPI’s outflows from India was the strengthening of the US $ which rose in September-October. This has contributed to increasing the US yields and adversely affecting the Indian stock market.

This withdrawal significantly affected market performance, leading the NSE Nifty index to decline by 8% during October 2024. India’s stock market is currently at unusually high levels, with valuations exceeding historical norms. This suggests an overly optimistic outlook despite signs of a slowing economy, weaker-than-expected corporate earnings in the second quarter, ongoing inflation, heavy taxation, and elevated interest rates.

Way Forward

Enhancing Market Competitiveness—Stock valuations in the Indian market deteriorated when attractive Chinese valuations were entered. This can be controlled by encouraging sustainable prices and reducing speculative surges, which can help stabilise the markets.

Control Inflation and review tax policies—Implementing Capital gains and controlling inflation (as high inflation was recorded ) will enhance India’s attractiveness as a favourable investment destination. It can also ease concerns about purchasing power parity and investor profitability.

Structural Reforms—Structural reforms should be implemented, such as providing ease of doing business, attracting long-term foreign investment, and reducing the dependency on short-term foreign investors.
Strengthen Global Engagement—An interactive platform should be established to facilitate smooth communication, allowing FPIs to address their concerns and receive clear, timely responses.

While October witnessed a significant outflow, stabilizing global and domestic factors could potentially bring FPIs back. Reforms in corporate and fiscal governance, combined with a robust growth trajectory, can make India a preferred investment destination in the long run.