Foreign portfolio investors (FPIs) are on course to sustain their buying momentum in Indian markets through August 2024, driven by a recovering earnings cycle, rupee stability, and India's strengthening GDP growth outlook, according to market analysts.

Total FPI inflows reached ₹23,543 crore this month up to 22 August, with ₹14,117 crore channelled through stock exchanges and ₹9,426 crore through the primary market and other categories.

What Is Driving FPI Inflows

Analysts point to a confluence of factors pulling foreign money back into Indian equities. The revival in corporate earnings, as reflected in Q1 results, has renewed confidence in India's growth story. Simultaneously, FPIs appear to be unwinding exposure to the so-called 'chip trade' — a crowded global bet on semiconductor stocks — and redeploying capital into emerging markets, with India among the prime beneficiaries.

Rupee stability has further lowered currency risk for dollar-denominated investors, while the broader market's growth prospects have added to the appeal. Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd, noted a striking pattern in this buying wave: 'A significant trend in the market is that FPIs are not buying attractively valued leading large banking or IT stocks. Instead, they are selectively buying mid-caps despite elevated valuations.'

Key Headwinds Remain

The inflow story is not without friction. Dr Vijayakumar flagged elevated US bond yields as a structural headwind, describing them as negative for global equities. Rising crude oil prices and persistent geopolitical uncertainty have also kept investor sentiment cautious, contributing to a volatile week for Indian benchmark indices that ultimately ended Friday largely flat.

IT stocks bore the brunt of sectoral pressure, declining around 2.6% during the week amid concerns over US inflation, high bond yields, and the broader global technology spending environment. FMCG and energy stocks also remained subdued. In contrast, realty, metal, and banking segments performed relatively well, supported by improving domestic sentiment.

Jackson Hole in Focus

Global attention is now fixed on the Jackson Hole symposium, where the US Federal Reserve's monetary policy guidance is expected to serve as a critical catalyst for markets worldwide. Ajit Mishra, Senior Vice President of Research at Religare Broking Ltd, said investors are closely monitoring the Fed's policy outlook ahead of the event.

On the domestic front, analysts say markets will track crude oil prices, rupee movements, foreign institutional flows, and domestic liquidity conditions in the sessions ahead.

What to Watch Next

The sustainability of FPI inflows will hinge on two variables: whether the Fed signals a pause or pivot at Jackson Hole, and whether India's Q2 corporate earnings season — now weeks away — confirms the Q1 recovery trend. A hawkish Fed surprise could reverse the recent mid-cap buying, while a dovish tilt would likely reinforce it. Domestic investors will also watch crude oil closely, given its direct bearing on the rupee and inflation trajectory.