FPI outflows hit Indian equities amid geopolitical tensions, Chinese market surge

Foreign Portfolio Investors (FPIs) have offloaded Rs 27,142 crore from Indian equities during the first three trading days of October 2024. This significant withdrawal has been attributed to escalating geopolitical tensions, rising crude oil prices, and a robust rebound in the Chinese markets. The outflows mark a stark contrast from the inflows recorded in September when FPIs invested Rs 57,724 crore—the highest in nine months according to a report by The Press Trust of India.

Geopolitical factors and market impact

The intensifying conflict between Israel and Iran has contributed to the ongoing market volatility, pushing crude oil prices higher. The spike in oil prices, combined with uncertainty surrounding the conflict, has shaken investor confidence, leading to substantial FPI withdrawals the PTI report detailed further. 

“The geopolitical tensions between Israel and Iran, along with soaring crude prices, have prompted foreign investors to reconsider their positions in Indian equities,” explained Himanshu Srivastava, Associate Director at Morningstar Investment Research India. He also noted that global factors such as interest rate directions and political developments would likely continue to influence foreign investment patterns.

Chinese market outperformance

Another significant factor contributing to the FPI exodus is the recent outperformance of Chinese equities. The Hang Seng Index saw a sharp rise of 26 per cent in the past month, making Chinese stocks more attractive to foreign investors, especially as the Chinese government’s fiscal and monetary stimulus takes effect.

“The surge in Chinese stocks, which are currently undervalued, is a key driver behind the FPIs shifting their focus away from Indian markets,” noted VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. The bullish trend in Chinese markets, combined with higher valuations in India, has further accelerated the FPI outflow.

Sectoral impact and opportunities

Sectors like financial services and banking were hit the hardest by FPI sell-offs. Several frontline banking stocks have seen sharp corrections, presenting potential opportunities for long-term domestic investors. Vijayakumar added, “Despite the sell-off, the current valuations of key banking stocks could provide a good entry point for investors looking at long-term growth.”

The withdrawal also impacted the Indian debt market, where FPIs pulled out Rs 900 crore through the General Limit but invested Rs 190 crore via the Voluntary Retention Route (VRR). Despite the outflows, FPIs remain net buyers in both equities and debt markets for the year, with investments totalling Rs 73,468 crore in equities and Rs 1.09 lakh crore in debt.

Outlook for Indian markets

Looking ahead, experts believe that global macroeconomic factors and geopolitical events will continue to shape FPI inflows and outflows. As the geopolitical landscape evolves and central banks weigh future rate hikes, Indian markets could face continued pressure in the short term. However, domestic investors may benefit from lower valuations, especially in sectors like financials, where FPI exits have been more pronounced.

While the FPI withdrawals in early October may pose challenges for Indian equities, the long-term outlook remains cautiously optimistic, depending on the resolution of geopolitical tensions and global market trends.