FPIs flood stocks in July, ignoring fiscal tax burden

Foreign portfolio investors (FPIs) continued to invest in Indian equities in July despite the recent budget squeeze in the form of a hike in capital gains tax on listed shares and an increase in securities transaction tax (STT) on F&O transactions.

Foreign institutional investors have invested a net Rs 33,688 crore in Indian equities this month (up to July 26), higher than the net inflow of Rs 26,565 crore in June 2024, depository data shows.

In May 2024, FPIs net sold ₹25,586 crore on poll-related worries (results were released on June 2). In April 2024, FPIs net sold over ₹8,700 crore on rising US bond yields and concerns over a change in the double taxation treaty with Mauritius.

Expecting a series of reforms in the Union Budget, FPIs purchased shares worth around Rs 18,000 crore between July 12 and July 22.

However, after the Budget announcement on July 23, foreign financial institutions withdrew nearly ₹ 8,100 crore in four trading sessions after the government last week increased capital gains tax on listed equities and also capital gains tax on the F&O sector.

On Friday, aided by all-round buying from both FPIs and DIIs, Nifty surged over 400 points to a new personal high. Both Nifty and Sensex gained for the eighth consecutive week, their longest winning streak in seven years.

In the current calendar year till July 26, FPIs have invested Rs 36,889 crore in equities and as much as Rs 87,848 crore in debt markets.

GDP growth up

FPI buying interest in July was buoyed by expectations of continued policy reforms, steady economic growth and a better-than-expected earnings season. Upward revision of GDP growth for India by the IMF and ADB also bolstered sentiment and buying interest.

Market experts believe that both the equity and debt markets in India are in a good position and may attract higher flows in the remaining months of the current calendar year.

The much-anticipated interest rate cut by the US Federal Reserve in September 2024, or even earlier, could boost equity capital flows into India from India-dedicated funds and global emerging market funds, they said.

India’s inclusion in global government bond indices

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said that a significant trend in FPI and DII investments in equities is that in the last 30 months, whenever FPIs became steady sellers, DIIs were steady buyers. As a result, in this bull market, FPIs lost the tussle as they recently bought the same stocks at higher prices which they had sold at lower prices earlier, he added.

Deposit data shows that foreign financial institutions invested Rs 19,223 crore in the Indian debt market in July 2024, which is higher than the net inflow of Rs 14,955 crore in June 2024.

Given India’s recent inclusion in global government bond indices, more inflows from foreign direct investors (FPIs) are expected in the coming months, experts said.

Some FPIs see the increase in capital gains tax in the last fiscal as a negative, even though the magnitude of the increase is moderate. Non-resident Indians, including FPIs who enjoy treaty benefits, are unlikely to be hit by the additional tax burden, tax experts said.