India Faces Sharp Decline in Foreign Portfolio Investments in 2024
India experienced an unprecedented drop in Foreign Portfolio Investment (FPI) inflows in 2024, marking a 99% decline compared to 2023. According to data from the National Securities Depository Limited (NSDL), net FPI inflows fell from ₹1.71 lakh crore in 2023 to a mere ₹2,026 crore in 2024. This sharp downturn highlights the challenges India faces in maintaining its appeal as a destination for foreign investments.
Global Economic Factors Impacting FPI
One of the primary reasons behind this decline is the shifting focus of global investors toward the United States economy. In 2024, the US markets performed exceptionally well, supported by resilient economic growth and prolonged higher interest rates. These factors made US bonds, equities, and money markets more attractive to investors. As a result, a significant portion of global capital shifted away from emerging markets like India to the US, leading to reduced FPI inflows into the Indian economy.
Domestic Challenges Add to the Problem
Apart from global factors, domestic economic conditions also played a significant role in the reduced FPI inflows:
- High Market Valuations
Indian stock markets faced challenges due to their elevated valuations. High price-to-earnings ratios and a market capitalization-to-GDP ratio above historical averages made Indian equities less attractive compared to other global investment options. - Slowing Economic Growth
India’s GDP growth rate slowed in 2024, which negatively impacted investor sentiment. Sluggish industrial production and declining corporate earnings further reduced the confidence of foreign investors in the Indian market. - Weaker Economic Indicators
Other economic indicators, such as industrial output and corporate profitability, also signaled weaker performance, making India a less favorable option for portfolio investments.
Implications for India’s Economy
The steep drop in FPI inflows has raised concerns about its potential impact on India’s financial ecosystem. FPI plays a crucial role in providing much-needed foreign capital, supporting the current account deficit, and boosting market liquidity. A significant reduction in these inflows could lead to increased pressure on the rupee, affect stock market performance, and limit the availability of capital for various industries.
The Path Forward
To address this decline, India needs to implement strategic measures to attract foreign investments. Some of the key steps could include:
Enhancing Economic Growth: Reviving GDP growth through targeted reforms and increased investment in infrastructure and industries.
Making Markets Attractive: Addressing valuation concerns by fostering a competitive and transparent market environment.
Strengthening Investor Confidence: Offering incentives, easing regulations, and improving ease of doing business to attract global investors.
Conclusion
The decline in FPI inflows in 2024 is a wake-up call for India to reassess its position in the global investment landscape. While the competition from advanced economies like the US remains a challenge, India has the potential to regain its standing by addressing structural issues and implementing growth-oriented policies. By making the right moves, India can ensure a stable and attractive investment environment in the years to come.
