ICICI Mutual Fund Report: FPI Influence on Indian Markets Declines Amid Economic Strength

Foreign Portfolio Investors (FPIs) continue to play a role in the Indian stock markets; however, their influence on major indices has diminished over time, according to a report by ICICI Mutual Fund. The report attributes this decline in sensitivity to the strengthening of India’s economy, which has made the markets more resilient to transient FPI flows.

The report states, “Though Indian markets continue to remain sensitive to FPI flows, the extent to which it is impacted has gone down.” It highlights that FPIs, traditionally a significant source of short-term capital in emerging economies like India, have recently been selling off their holdings in Indian markets. This sell-off has led to large-cap stock valuations becoming more reasonable compared to mid- and small-cap stocks.

ICICI Mutual Fund expresses a preference for large-cap schemes over mid- and small-cap schemes, noting that large caps are likely to benefit the most if FPIs return to the markets. “The current sell-off by FPIs has made large-cap valuations reasonable compared to mid and small caps,” the report adds.

Market Volatility Amid Global Economic Concerns

Despite this, the report cautions that overall market valuations are not currently cheap. Rising geopolitical tensions and weak macroeconomic indicators in the US—such as a high fiscal deficit, ballooning debt, and a significant current account deficit—are contributing to near-term market volatility. The ability of the newly elected Republican administration in the US to address these challenges will be closely monitored.

The global economic environment is also impacting FPI flows. In October 2024, China’s stimulus measures aimed at boosting its economy and the anticipated strength of the US economy, following the Republican Party’s re-election, led to significant FPI outflows from emerging markets, including India. Additionally, a slowdown in corporate earnings in India has further dampened investor sentiment, as high valuations combined with below-par earnings raise concerns about potential growth slowdowns.

Despite these challenges, the report remains optimistic about India’s long-term growth trajectory. It describes the current FPI sell-off as a transient phase and anticipates a return of FPIs to the market soon. While intermittent volatility in equity markets may occur, the structural strengths of the Indian economy are expected to sustain long-term growth.