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The year 2024 witnessed a dramatic decline in Foreign Portfolio Investment (FPI) inflows into India. According to data released by the National Securities Depository Limited (NSDL), net FPI investments plunged by a staggering 99 percent, plummeting from a substantial ₹1.71 lakh crore in 2023 to a mere ₹2,026 crore in 2024. This drastic reduction represents a significant challenge for India's efforts to attract crucial foreign investment, underscoring the need for a comprehensive analysis of the underlying causes and potential remedial strategies.
Experts attribute this sharp decline to a confluence of factors, both global and domestic. The dominant force appears to be the exceptional performance of the US economy. The robust US economy, coupled with resilient stock markets and the Federal Reserve's prolonged policy of maintaining higher interest rates, created a powerful magnet for global investment. This led to substantial capital flows into US money markets, bonds, and equities, diverting funds away from emerging markets like India. This phenomenon, often referred to as 'US exceptionalism', effectively siphoned off investment capital that might have otherwise flowed into India.
Beyond the allure of the US market, several internal factors within the Indian economy contributed to the reduced attractiveness of Indian assets for foreign investors. Higher valuations in the Indian market, coupled with an elevated market capitalization-to-GDP ratio, signaled to FPIs a potentially overvalued market. Furthermore, slower GDP growth, weaker industrial output, and reduced corporate earnings growth further dampened investor enthusiasm. These indicators painted a less optimistic picture of India's short-term economic prospects, making it less competitive compared to other investment destinations.
The political climate in India also played a role. The 2024 general elections contributed to a slowdown in government spending and public infrastructure projects. This reduced overall economic activity and created uncertainty among foreign investors wary of potential policy shifts following the election. The anticipation of governmental changes and uncertainty about future policies often leads to caution and a preference for more stable investment environments during election periods.
Adding to the complexities of the situation, a significant injection of capital into the Chinese stock market further diverted funds away from India. Between September 24 and October 8, a substantial USD 53 billion flowed into Chinese equities due to a long-awaited stimulus package. This influx of capital into a competing emerging market exacerbated the already challenging situation for Indian markets, highlighting the global competition for investment capital.
The performance of the Indian banking and non-banking financial institutions also contributed to the reduced FPI inflow. The Reserve Bank of India's (RBI) tightening of regulations on unsecured lending and the resulting decrease in liquidity significantly impacted these sectors, which historically held a substantial weight in FPI portfolios. This led to FPIs net selling USD 35 billion worth of shares in the financial sector during the year. The regulatory changes, while aimed at stabilizing the financial system, inadvertently created headwinds for foreign investment in these crucial sectors.
Global monetary policy shifts also played a part. Changes in the Bank of Japan's monetary policy affected the 'yen carry trade', leading to outflows from emerging markets, including India. This demonstrates the interconnectedness of global financial markets and how policy changes in one region can have ripple effects across others, particularly in emerging market economies reliant on foreign investment.
Despite the significant challenges, it's important to note that FPIs maintained some level of engagement in India's primary markets, indicating a persistent level of confidence in specific long-term growth opportunities. This suggests that despite the short-term setbacks, India's underlying potential still holds some appeal for foreign investors. Furthermore, the robust performance of domestic investors provided a buffer, mitigating the potential for significant market disruptions caused by the outflow of FPI funds. This showcases the increasing importance of a strong domestic investor base in cushioning the impact of external shocks.
In conclusion, the drastic decline in FPI inflows to India in 2024 is a complex issue stemming from both global economic dynamics and domestic factors. The strength of the US economy, coupled with challenges such as higher valuations, slower growth, and regulatory changes within India, created an unfavorable investment climate. However, the continued presence of FPIs in select sectors and the strength of the domestic market suggest that India's long-term prospects remain relatively positive. Addressing the challenges requires a multi-pronged approach involving both macroeconomic adjustments and targeted policies to enhance investor confidence and attract foreign capital in the future.
Source: FPI inflows decline 99 pc in 2024 to ₹2026 cr from ₹1.71 lakh crore in 2023