Indian Market Soars to Record Highs in May Despite FPI Outflows: Analysis on Impact of INR (₹)

<ul>
    <li>Foreign Portfolio Investors (FPIs) have been steadily divesting from Indian stock markets, with withdrawals totaling over ₹35,000 crore in May so far.</li>
    <li>This move is attributed to multiple factors, including high valuations in the Indian market, a shift in investment focus towards China and Hong Kong, delays in anticipated interest rate cuts by the US Federal Reserve, rising US bond yields, heightened tensions in the Middle East, and the strength of the US dollar.</li>
    <li>"Despite these significant outflows, the Indian stock market has displayed remarkable strength and resilience," said a market analyst.</li>
</ul>
<p><strong>FPIs withdraw ₹35,000 crore from Indian stock markets in May, yet domestic investors keep the market buoyant.</strong></p>
<h2><strong>Domestic investors narrow the ownership gap with foreign institutions</strong></h2>
<p>The Indian household sector plays a vital role in the country's economy, contributing significantly to the overall gross domestic savings.</p>
<p>Traditionally, Indians have favored bank deposits for saving their earnings, valuing the perceived safety and stability they offer over the perceived volatility and complexity of the stock market.</p>
<p>However, recent trends indicate a notable shift, especially among young investors, who are increasingly willing to embrace some level of risk by venturing into the stock market and expanding their investment portfolios beyond conventional assets.</p>
<p>This shift in attitude is reflected in the record number of 32 million demat accounts opened in FY24, along with positive inflows into mutual funds for the 38th consecutive month in April, with the number of SIP accounts hitting a new high of 8,70,11,401 in April.</p>
<p>This trend has led to a substantial transformation in the ownership landscape of Indian equities, marked by a significant narrowing of the gap between foreign and domestic institutional investors.</p>
<p>FIIs have notably scaled back their exposure to Indian equities, resulting in a decline in foreign investor holdings in NSE-listed companies to an 11-year low of 17.7% during the March quarter.</p>
<p>Conversely, domestic investor holdings surged to 16.1%, indicating a remarkable shift in ownership dynamics. At the end of the March quarter, the difference between FII and DII ownership of Indian equities stood at 1.6%, compared to a 10.3% gap recorded in March 2015.</p>
<p>This data, cited from PrimeInfobase by CNBC TV18, underscores the growing confidence and participation of domestic investors in the Indian stock market.</p>
<h3><strong>Reallocation of funds</strong></h3>
<p>FPIs have been reallocating their funds to Chinese markets due to attractive valuations. Chinese tech stocks, in particular, are drawing more investors, buoyed by an earnings season featuring better profits, increased buybacks, and dividends.</p>
<p>Analysts have revised the Hang Seng Tech index’s forward-earnings estimates to a three-year high following stronger-than-expected profits from Tencent and other major players.</p>
<p>These results, coupled with the easing of Beijing’s prolonged regulatory crackdown, indicate that shares of Chinese tech firms may have reached their lowest point.</p>
<p>This optimism has already attracted some investors back to the sector, pushing the Hang Seng Tech up by 33% since the end of January. Despite this rise, the index tracking China’s leading tech firms is trading at less than 17 times forward-earnings estimates, significantly below its five-year average of 26 times, Bloomberg reported.</p>
<p>On the domestic front, election-related uncertainties are also contributing to FII selling.</p>
<h3><strong>Conclusion</strong></h3>
<p>Despite substantial FPI outflows, the Indian stock market has shown resilience, largely due to the robust participation of domestic investors. This shift in investment dynamics highlights the growing confidence of Indian investors in their market. Meanwhile, FPIs are reallocating funds to Chinese markets, attracted by better valuations and improved earnings prospects. The evolving landscape suggests a more balanced ownership structure, with domestic investors playing an increasingly significant role.</p>