FPIS SELL IN EQUITIES IN LAST 3 YEARS, BUY INTO DEBT

FPIS SELL IN EQUITIES IN LAST 3 YEARS, BUY INTO DEBT

One has to only look at the daily FPI numbers to get an idea that foreign portfolio investors have been selling aggressively into India. If one looks at the last 3 years, since the start of 2024; FPIs have been net sellers to the tune of $(12.92) billion overall. However, that is not the full story. In this period, while they have been net buyers of $35.56 billion in debt, they were net sellers of $(48.48) billion in equities. This dichotomy is the real story about FPIs.

The story becomes a lot more pronounced if one looks at the FPI equity numbers post September 2024. In this period post September 2024, FPIs were net sellers to the tune of $(60.53) billion in equities. Since September 2024, not only has the FPI assets under custody (AUC) come down by more than 30%, the overall markets have also struggled. We will come to the factors later, but first let us look at why FPIs were net buyers in debt.

WHY FPIS WERE NET BUYERS IN DEBT?

It must be noted that the FPI net buying of $35.56 billion since the start of 2024 was largely driven by two major factors. Firstly, there was the decision by major indices to include Indian sovereign debt into their indices. That triggered substantial flows into sovereign debt. Secondly, the government has exempted any interest earned on sovereign bonds by FPIs from taxation. That has also driven a good deal of buying in Indian bonds. The point is that the debt buying could have been a lot better, but for 3 impeding factors.

Firstly, the inclusion of Indian bonds in the Bloomberg World Index continues to be elusive. That can open up Indian debt to a large cache of passive funds. Secondly, the weak currency has been a factor, despite the tax breaks. On an average, currency has depreciated by 4.5% to 5.0% annually in the last 3 years. Thirdly, with US bond yields at elevated levels, and a spread of just 180 bps to 210 bps on Indian benchmark bonds; Indian debt is losing out to safe haven buying. But for these 3 factors, FPI bond flows could have been higher.

WHY HAVE FPIS BEEN SELLERS IN EQUITIES?

There have been several triggers for the consistent FPI selling in Indian equities. Firstly, there are concerns over the limited upside participation for India in the AI space. Much of the participation is in the low-value and resource-intensive areas. Secondly, we spoke about the weak Indian rupee. That has been a major factor for FPIs. With Indian indices virtually flat over the last 2 years, the 5% fall in the rupee is starting to pinch.

Thirdly, there is the interest rate factor. As global central banks turn hawkish, for the RBI, the question is not whether but when. Markets are anticipating a 50-bps rate hike by the end of 2026. That has major implications for cost of debt, and for equity valuations. Above all, there is geopolitical uncertainty. Since the start of 2025, there were the US tariffs, and in 2026 we have had the Gulf war. Both have hit supply chains badly.

REAL ISSUE; VALUATIONS ARE NOT LOOKING CHEAPER

If you look at the history of FPI flows into India, it is rare to see them sell so consistently in Indian stocks. Even during COVID, the massive selling was followed by aggressive buying. To understand that point, let us look at comparative valuations over 4 points.

India’s P/E ratio may be in the range of 18-19X in rupee terms, but in dollar terms, it is closer to 22X due to the weak rupee impact. To be fair, India’s P/E valuations have come down sharply between January 2024 and September 2026. However, for FPIs, it is more of a comparative argument that is working against India.

The US index is available at above 26X, and there is no dollar worry here. Also, it has been one of the biggest beneficiaries of the AI surge. Remember, US stocks have been among the top performing asset classes in the last decade.

If you look at a manufacturing base; both China and Japan are available way below India in terms of valuations. The same applies to Taiwan, which has emerged as one of the biggest factories for chips.

Then comes the AI argument. Agreed that Taiwan is expensive, but two other AI plays (China and Korea) are available at relatively cheaper valuations. And if we are look at the commodities story, Brazil is almost in single-digit P/E valuations.

That is what is turning the FPI story. When they look at India as a comparative narrative, there is still a long way to go for India to again appear attractive!