Foreign investors pull out ₹5,200 crore from Indian equities
In April, foreign investors withdrew over ₹5,200 crore from Indian stocks. Per depository data, foreign portfolio investors (FPIs) have recorded a net outflow of ₹5,254 crore, from Indian equities this month so far. The main reason for this sell-off by FPIs was the revision in India's tax agreement with Mauritius, that would now entail increased scrutiny on investments originating from the island nation. The withdrawal follows a significant net investment of ₹35,098 crore in March, and ₹1,539 crore in February.
Revised tax treaty triggers investor concerns
The updated tax treaty now demands stricter scrutiny of investments channeled through Mauritius into India. Himanshu Srivastava, Associate Director of Manager Research at Morningstar Investment Research India, explained that the two countries have agreed on a protocol to amend their double taxation avoidance agreement (DTAA). The protocol stipulates that tax benefits cannot be exploited for indirect gains by residents of another country. Indeed, the majority of investors utilizing Mauritius entities to invest in Indian markets hail from other countries.
US inflation and bond yield surge impact Indian market
Another factor contributing to the sell-off was the unexpected rise in US inflation, and the subsequent increase in bond yield. This led to significant selling pressure in the Indian market. Other significant concerns stem from escalating geopolitical tensions in the Middle East, particularly the heightened discord between Iran and Israel. Apart from equities, FPIs also withdrew ₹6,174 crore from the debt market.
Sector-wise investment trends among foreign investors
In terms of sectors, FPIs were primarily selling IT stocks due to expected underperformance in Q4 of FY24. They also offloaded FMCG and consumer durables. However, they showed interest in auto, telecom, capital goods, financial services, and power sectors. Despite the recent withdrawals, the total inflow for this year so far is ₹5,640 crore in equities, and ₹49,682 crore in the debt market.
