After infusing a staggering amount in Indian equities in the past three months, the pace of inflow from foreign investors ebbed in August with a net investment of Rs 10,689 crore on higher crude oil prices and resurfacing of inflation risks.
Further, markets could remain volatile in the coming week due to macroeconomic uncertainty and rising US bond yields. This has been prompting FPIs to flee emerging market equities, including India, and park funds in haven US securities, said Shrikant Chouhan, Head of Research (Retail), Kotak Securities Ltd.
Also, the poor monsoon in August and its skewed spatial distribution may keep inflation elevated, and this is becoming an area of concern impacting sentiments in the market. This might impact FPI investment too, V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.
According to the data with the depositories, Foreign Portfolio Investors (FPIs) invested a net amount of Rs 10,689 crore in Indian equities this month (till August 26).
This figure includes investment through the primary market and bulk deals, which have been gathering momentum recently.
Before this investment, FPIs invested over Rs 40,000 crore each in the past three months in Indian equities.
The net inflow was at Rs 46,618 crore in July, Rs 47,148 crore in June, and Rs 43,838 crore in May. Before that, the inflow was Rs 11,631 crore in April and Rs 7,935 crore in March, data with the depositories showed.
The lower quantum of net inflow this month could be attributed to FPIs adopting a wait-and-watch approach ahead of the lined-up event at the Jackson Hole for further insights on the upcoming monetary policy by the US Federal Reserve, Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said.
The next Federal Open Market Committee (FOMC) meeting is scheduled for September 19-20.
Additionally, higher crude oil prices and resurfacing of inflation risks, firming up of bond yields in the US, would have led some foreign investors to drift away from riskier markets in favour of greater certainty and better risk-reward profile offered by US treasuries, Srivastava said.
Also, the recent rally in the Indian equity markets could have resulted in its valuation going beyond the comfort level of a few investors, he added.
"The pace of FPI investments is influenced by the expectations of the endowments and pension funds that sponsor them. With the US 20-year bond rate at 4.65 per cent, FPIs' willingness to invest in riskier Indian equities could be dampened, as these funds usually target a return of about 6 per cent, " Mayank Mehraa, smallcase Manager and Principal Partner at Craving Alpha, said.
This caution is driven by the availability of safer investments offering comparable returns without the higher risks associated with equities. Consequently, while FPI investments continue, their moderation reflects the intricate interplay of global market dynamics, investor preferences, and potential returns, he added.
Apart from equities, FPIs invested Rs 5,950 crore in the country's debt market during the period under review.
With this, the total investment by FPIs in equity has reached Rs 1.37 lakh crore and Rs 26,400 crore in the debt market so far this year.
In terms of sectors, FPIs are consistently buying capital goods. And, of late, they have started selling in financials.