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Context:

As benchmark indexes saw increased Foreign portfolio investment (FPI) selling pressure in early trading on Monday.  

What is FPI?

Foreign portfolio investment (FPI) is when investors buy financial assets in another country, such as stocks and bonds, to diversify their portfolios.  

It is one of the most common ways to invest in an overseas economy, however, it does not provide management control over the company's assets and is relatively more liquid.

Factors triggering the FPI selloff

Domestic causes

The market's unfavorable opinion has been linked to concerns about slow corporate growth and potential earnings reductions, which are leading stock valuations to re-rate.

Domestic investors, such as mutual funds, are not buying as much as foreign portfolio investors are offloading in recent times, unlike earlier adjustments when an FPI selloff was generally viewed as a buying opportunity by domestic funds. 

There is a growing awareness that the interest rate cut by the Reserve Bank of India (RBI) is unlikely to occur before the end of the current fiscal.

Volatility related to the US elections and the Federal Reserve's decision

The Indian markets, like global stock markets, are focused on the outcome of the US presidential elections, and analysts are expecting a second Trump administration. The expected outcome, which is viewed as generally positive for American stocks and extremely favorable for the dollar, is viewed as somewhat negative for securities.

The US Federal Reserve's monetary policy meeting, which is scheduled for November 6-7. Concerns have been raised that the Federal Open Market Committee may hold rates, and the Fed's inflation outlook may temper future rate cuts.

According to market participants, the aggressive selling by FPIs reflects a coordinated shift by foreign investors to China, particularly given the Indian market already dropped appeal due to slow corporate earnings and concerns about overvaluation.

The Big China Factor

The Standing Committee of the National People's Congress, China's top legislative body is expected to approve an economic stimulus package that could include more funds for acquiring idle land and property, recapitalizing banks, refinancing provincial government debt, and providing assistance to households.

China is closely watching the US election results. Trump's election victory could result in tariffs of more than 50% on Chinese goods, reducing China's growth by more than two percentage points over the next year, according to analysts. This possibility could be factored into Beijing's stimulus package. 

China's fiscal stimulus package is to reach 2-3% of the country's GDP per year over the next several years. This could make other markets, including India, less appealing to foreign portfolio investors.

Benchmark Indices in India They represent a portion of top-performing corporations and are used to predict market trends and investor sentiment. The Bombay Stock Exchange (BSE) includes 30 of the largest and most actively traded equities on the BSE. It was established in 1875, the oldest in Asia. Nifty 50 (NSE Nifty) is the National Stock Exchange's (NSE) benchmark index, consisting of 50 large-cap businesses. It was launched in 1996.

FPI Selloff and Its Impact on India

It increases volatility in the Indian stock market. The Nifty 50 and Sensex have experienced significant declines. 

In October 2024 approx Rs 94,000 crore FPI withdrawal from India.  

The large-scale withdrawal of foreign funds can put pressure on the Indian rupee, which can result in depreciation against major currencies. 

It can affect the overall investment environment making investors more careful, however, the long-term impact will depend on how quickly the market recovers and attracts new investment. 

It can affects the economic growth of the country by reducing the availability of capital for business; it can hamper corporate investment and expansion plans.

Must Read Articles: 

FPI IN INDIA

Source: 

Indian Express

Investopedia

PRACTICE QUESTION Q.Consider the following statements in the context of the Foreign Portfolio Investment (FPI): 1.  One of the biggest advantages of FPI is its flexibility. 2. It allows investors to purchase a direct business interest in a foreign country. Which of the above statements is/are correct? A) 1 only B) 2 only C) Both 1 and 2 D) Neither 1 nor 2 Answer:  C Explanation: Statement 1 is correct: FPI allows investors to enter and exit markets as per their needs, making it an ideal choice for those aiming to react to changing market conditions. Statement 2 is correct: FPI, like portfolio investment in general, does not require an investor to actively manage the assets or the firms that issue them. They don't have direct control over the assets or businesses. As opposed, foreign direct investment (FDI) allows an investor to acquire a direct commercial interest in a foreign country.