New Delhi: According to a report by ICICI Mutual Fund, Foreign Portfolio Investors (FPIs) continue to play a role in shaping Indian stock markets, although their influence on major indices has diminished over time.
The report attributes this reduction in sensitivity to the strengthening of India's economy, which has enhanced the markets' resilience against fluctuating FPI investments.
It stated, "While Indian markets still exhibit sensitivity to FPI flows, the degree of impact has decreased."
Additionally, the report pointed out that FPIs, which have historically been a crucial source of short-term capital in emerging markets like India, have recently been divesting their holdings. This trend has led to more reasonable valuations for large-cap stocks in comparison to mid- and small-cap stocks.
The report expressed a preference for large-cap schemes over mid- and small-cap schemes, indicating that large caps are likely to gain the most if FPIs re-enter the market. "The current sell-off by FPIs has resulted in more attractive valuations for large caps relative to mid and small caps," it noted.
However, the report also warned that overall market valuations are not currently low. It highlighted that rising geopolitical tensions and unfavorable macroeconomic indicators in the US, such as a high fiscal deficit, increasing debt, and a substantial current account deficit, are contributing to short-term market volatility.
The report emphasized that the ability of the newly elected Republican administration in the US to tackle these issues will be closely monitored.
Furthermore, the global economic landscape is affecting FPI flows. In October 2024, China's economic stimulus measures and the expected strength of the US economy following the Republican Party's re-election resulted in significant FPI outflows from emerging markets, including India.
A decline in corporate earnings in India has further weakened investor confidence, as elevated valuations alongside underwhelming earnings have sparked worries about a possible growth slowdown.
Nevertheless, the report maintains a positive outlook on India's long-term growth potential.
It characterizes the ongoing foreign portfolio investor (FPI) sell-off as a temporary situation, anticipating a swift return of FPIs.
Although the equity markets may experience occasional fluctuations, the fundamental strengths of the Indian economy are projected to support sustained long-term growth.
