Foreign investors have adopted a cautious approach this month, offloading domestic equities worth ₹13,000 crore in the first three weeks owing to high valuations of Indian stocks and surging U.S. bond yields.
In contrast, foreign investors are bullish on the debt market and injected ₹15,647 crore in the debt market during the period under review, data with the depositories showed.
According to the data, foreign portfolio investors (FPIs) made a net withdrawal of ₹13,047 crore in Indian equities this month (till January 19).
They pulled out over ₹24,000 crore from equities during January 17-19. Before this, FPIs made a net investment of ₹66,134 crore in December and Rs 9,000 crore in November.
"There are two main reasons why FPIs turned sellers. One, the US bond yield started rising with the 10-year yield rising from the recent level of 3.9% to 4.15% triggering capital outflows from emerging markets," V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.
"Second, since the valuations in India are high, FPIs used the excuse of less-than-expected results from HDFC Bank to press massive sales too," he added.
The extensive selling by FPIs could be attributed to offloading their stake in HDFC Bank given its disappointing quarterly results, Himanshu Srivastava, Associate Director, Manager Research, Morningstar Investment Research India said.
FPIs started the new year with a cautious approach opting to book profits in the Indian equity markets as key stock indices touched all-time high levels, he said.
Moreover, uncertainty over the interest rate scenario also prompted them to stay on the sidelines and wait for further cues, before deciding to invest in emerging markets like India, he added.
Besides, FPIs were big sellers in other emerging markets such as Taiwan, South Korea and Hong Kong.
With regard to a bullish stance on debt markets, Kislay Upadhyay, smallcase manager and founder of FidelFolio Investments, said expectations of rate cuts in India have increased, long term debt bonds are expected to gain disproportionately from any sudden drop in yield.
This came following a net investment of ₹18,302 crore in the debt market in December, ₹14,860 crore in November, and ₹6,381 crore in October, data showed.
The announcement by JP Morgan Chase & Co. in September that it will add Indian government bonds to its benchmark emerging market index from June next year has influenced the inflow in the country's bond markets in the past few months.
In terms of sector, FPIs have been buying IT stocks this month after the management commentary following the Q3 results of IT managers indicated optimism of demand revival in the sector.
Overall, the total FPI flows for 2023 stood at ₹1.71 lakh crore in equities and ₹68,663 crore in the debt markets. Together, they infused $2.4 lakh crore into the capital market.
The flow in Indian equities came following a worst net outflow of ₹1.21 lakh crore in 2022 on aggressive rate hikes by the central banks globally. Before the outflow, FPIs invested money in the last three years.
