Foreign Investors Reengage with Indian Market as Equities Drive Recovery

Foreign portfolio investors (FPIs) have shifted their strategy in July, becoming net buyers in Indian markets after months of selling. In the first ten days of July, FPIs invested $2.59 billion (Rs 24,662 crore), a notable change from the previous months when they withdrew significant amounts. This turnaround is attributed to a steady rupee and a shift in investment focus from semiconductors to equities.

Shift in Investment Trends

In June, FPIs primarily focused on debt investments, driven by government and Reserve Bank of India measures that eased access to sovereign bonds. However, July has seen a resurgence in equity investments, which accounted for $1.6 billion, or over 61% of total inflows. Investments through the fully accessible route (FAR) reached $697 million, while general debt investments totaled $340 million.

The recovery in July follows a period of significant outflows, where FPIs withdrew more than $24 billion from Indian markets between March and May, including a record $13.6 billion in March. The trend began to reverse in June with net inflows of $531 million, and July has continued this positive momentum, with every trading session from July 1 to July 10 recording net inflows. Notably, July 9 saw a single-day investment of nearly $978 million.

Equities Regain Favor

The most striking aspect of this shift is the renewed interest in equities. After four consecutive months of selling, including withdrawals of over $5.1 billion in June, equities have emerged as the largest destination for foreign capital in July. In the first ten days, foreign investors poured in Rs 15,157 crore (approximately $1.6 billion) into Indian shares.

Debt investments remain appealing, with continued strong inflows through both the FAR and general debt routes, building on June’s surge in bond purchases. Analysts suggest that a significant portion of the inflows is directed towards financial services. Suresh Ganapathy from Macquarie noted that with increased volatility in markets like Korea and Taiwan, inflows into Indian financials are likely to lead the recovery. VK Vijayakumar, chief investment strategist at Geojit Investments, attributed the improved sentiment to stronger economic fundamentals and a more stable currency.

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