India Faces Steep FPI Decline Amid Global Economic Shifts

India witnesses a 99% drop in Foreign Portfolio Investment in 2024, primarily due to the dominance of the US economy and internal economic challenges. Other factors like the Chinese market stimulus and RBI's tightened regulations further contributed to this decline, underlining the need for strategic intervention.

In 2024, India saw a dramatic 99% decrease in Foreign Portfolio Investment (FPI) inflows, according to the National Securities Depository Limited (NSDL). From Rs 1.71 lakh crore in 2023, net investments plummeted to a mere Rs 2,026 crore the following year, highlighting significant hurdles in attracting foreign capital.

Stock market experts point to the overwhelming strength of the US economy as a critical factor. A robust US economy, strong stock markets, and prolonged higher interest rates attracted investment to US bonds, money markets, and equities, detracting from emerging markets like India. Indian markets also lost allure due to elevated valuations, a high market cap-to-GDP ratio, slowing GDP growth, weaker industrial output, and diminished corporate earnings growth.

Market expert Ajay Bagga commented to ANI that US exceptionalism was the primary reason behind the tempered FPI flows into India. The general elections and subsequent slowdown in government spending further deterred investments, reducing economic momentum. Additionally, India's banking sector underperformed due to tighter RBI regulations on unsecured lending and liquidity constraints, causing FPIs to sell off USD 35 billion in financial stocks.

Further exacerbating the situation, a long-anticipated Chinese stimulus briefly redirected USD 53 billion into Chinese equities between late September and early October, drawing capital away from India during the same period. The Bank of Japan's monetary policy changes also impacted the 'yen carry trade,' leading to outflows across several emerging markets, including India.

Despite these challenges, FPIs maintained some interest in India's primary markets, confident in select long-term growth potential. Meanwhile, domestic investors rose to fill the gap, softening the exit of FPIs. The steep decline in FPI inflows underlines India's need to address global and domestic factors to sustain foreign investments and foster economic growth.

(With inputs from agencies.)