Why FPIs are waiting to return to Indian equities
Nirav Karkera explains how corporate earnings, rupee stability, and global triggers will drive foreign portfolio investors back to Indian equities.
The return of Foreign Portfolio Investors (FPIs) to the Indian stock market is not a matter of "when" but "under what conditions." According to Nirav Karkera, Head of Research and Fund Manager at Wealth by Groww, a perfect storm of domestic strength and global shifts is required to lure overseas capital back into the country.
For FPIs to regain their footing in Indian equities, Karkera identifies a trifecta of essential factors: a sustained improvement in corporate earnings, stability in the Indian Rupee (INR), and favorable shifts in the global economic landscape.
The Currency Conundrum
One of the primary hurdles for foreign investors is the performance of the local currency. Since FPIs assess their returns in US dollar terms, the rupee's depreciation acts as a significant deterrent. The currency has seen a 6-7 per cent depreciation this year, which, when combined with weaker equity performance, has diminished the attractiveness of the Indian market.
Karkera noted that while recent FCNR inflows provided some relief, they are not a permanent fix. He specifically cautioned against viewing the dollars raised through the RBI’s swap window as a sustainable support mechanism, noting that these funds must eventually be returned upon maturity.
The stability of the rupee remains vulnerable to two major external pressures:
- Crude Oil Prices: If oil stays above USD 100 per barrel, the widening trade deficit could further strain the currency.
- US Yields: Higher US yields and narrowing spreads between Indian government securities and US Treasuries could weigh heavily on the INR.
Despite these pressures, Karkera expects the Reserve Bank of India (RBI) to manage the currency carefully, allowing it to find its natural level without permitting a sharp, destabilizing fall.
Domestic Earnings and Global Triggers
The upcoming September-quarter earnings will be a critical litmus test. Karkera suggests that FPIs are waiting for a signal that the previous quarter's strong performance can be sustained and that earnings growth is being upgraded once again.
Beyond domestic borders, Karkera pointed to two potential "external triggers" that could redirect global capital toward India:
- US Bond Yields: A possible reversal in US bond yields could make emerging markets more appealing.
- AI Stock Correction: A correction in overseas AI-related stocks could trigger profit-booking in the US, prompting investors to explore opportunities in Indian markets.
IPO Optimism vs. Secondary Market Fatigue
Interestingly, there is a stark contrast between the struggling secondary markets and the booming Initial Public Offering (IPO) sector. Between April and September, mainboard IPOs raised approximately Rs 94,000 crore. Furthermore, average listing gains have surged to 19-20 per cent, up from just 7-8 per cent during the same period last year.
This indicates that global optimism remains high for new businesses entering the market, evidenced by healthy FPI participation in IPO anchor books.
A Warning for Retail Investors
While the macroeconomic outlook remains resilient, Karkera issued a word of caution regarding the endurance of domestic investors. He noted that nearly eight quarters of limited market gains could eventually test the patience of retail participants.
"Most fatigue and disappointment seeps in more through the passage of time and not as much through intermittent declines," Karkera warned. He added that if FPIs take too long to return, a rise in Systematic Investment Plan (SIP) stoppages could weaken one of the most vital pillars of support for the Indian market.