FPI Buying – Has the tide finally turned for Indian equities?

FPI buying has not just been a turnaround; it has almost been a deluge in the last 20 days. One can argue that a few swallows do not make a summer; but are we on the cusp of a FPI flow turnaround?

FPI flow numbers are staggering

For a long time, Indian investors believed that FPIs had virtually abandoned Indian markets. After all, FPIs had net sold equities worth $84.5 billion in secondary markets between October 2024 and September 2026. This was partially redeemed by around $22 billion of IPO buying, but net equity selling was still around $62.5 billion. In contrast, the last 20 days have seen about $6 billion of FPI money coming into India. The second fortnight of October saw $1.70 billion infused into India, while the first week of November saw nearly $4.12 billion being infused. Has the tide actually turned?

Several factors have turned favourable

In a surprising turn of events, several factors contributed to this turnaround. Firstly, the victory of the Democrats in the US has raised hopes that US spending will be curtailed and the war in Iran will end soon. Both are positive signals for India. Secondly, oil prices fell by nearly 19.5% in the first 3 days of November on hopes of restoration of normalcy in the Gulf. For India, that means a lot as it helps the rupee to harden and also reduces the trade deficit. After all, India still relies on imports for 90% of its oil needs. Q2 results have been strong under pressure, but the real big story was the contra-AI trade. Billions of dollars are now flowing out of AI stocks and back into traditional technology stocks.

Market reaction has also been positive

The weight of FPI buying was visible in the market reaction. In the last 6 trading sessions, the Nifty index gained 1,838 points (+10.27%), while the Sensex is up 7,782 points (+10.62%). This is one of the best pre-Diwali rallies that the markets have seen, even bettering the 7% rally ahead of 2020. What is also positive is that many frontline stocks are seeing concerted buying from FPIs; like Reliance Industries, Jio Platforms, HDFC Bank, Bharti Airtel, ICICI Bank, TCS, and Larsen & Toubro. FPIs also find some of the IT companies and private banks attractively valued compared to their historic averages. Also, a lot of the FPI buying has been shifting to small and mid-cap stocks.

Too early to be optimistic about FPI inflows

While there has been substantial reverse flows, it is still quite small compared to the $84.5 billion of FPI selling in secondary markets since October 2024. While the contra-AI trade has been working in favour of India, global investors have not given up on AI. It is just the froth getting out of markets amid greater investor insistence on ROI. If you look at the Buffett Indicator, India is still at around 130%, which is substantially above the average of the last 10 years. In fact, despite the FPI selling, DFI buying ensured that valuation concerns did not go away completely. The big caution factor for FPIs will be the Indian rupee, especially with the massive dollar shorts and FCNR payouts!