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While the U.S. Treasury yields hovering around 4.6%, the Indian rupee has depreciated by 3.3% over the last six months against the U.S. dollar, making Indian markets less attractive to overseas investors.
According to Amish Shah, Head of India Research at BofA Securities, global investors typically seek around 15% returns from emerging markets like India. However, with risk-free dollar returns at 4.5% and a widely expected 5%-rupee depreciation, investors are assured of a 9% risk-free return. Additionally, investors would expect an additional 500 to 600 basis points (bps) returns from the equity market to compensate the risk associated with it. “We believe developed markets will outperform emerging markets, including India, this year. FPIs will continue to favour U.S. equities and bonds,” Shah noted. He added that achieving the ideal 15% return from Indian markets in 2025 seems highly unlikely.
The benchmar Nifty50 has dropped by 3.3% in dollar terms this year, while the Dow Jones has gained 4.3% and Germany’s DAX has risen by 12%. Meanwhile, France’s CAC 40 and Hong Kong’s Hang Seng have each surged by nearly 10% during the same period.
On Wednesday (February 12), FPIs sold another $572 million worth of Indian shares, taking this year’s outflow to about $11 billion. Since the end of September last year, FPIs have cumulatively sold $23 billion worth of Indian shares on a net basis, show Bloomberg data.
As per NSDL data, FPI holdings in Indian equities stood at $782.1 billion at the end of January 2025, accounting for about 16% of the Indian equity market. The sharp sell-off from the world’s fifth-largest equity market has driven FPI ownership to a 12-year low. Their stake in the top 500 NSE-listed companies stood at 18.8% as of December 2024.
However, a decade-low ownership in the Indian market doesn’t necessarily signal a rebound. “FPIs can always reduce their stake, and when India becomes more attractive, they can scale it back up as needed,” Shah added.