Foreign investors have adopted a cautious stance and infused ₹7,320 crore in the Indian equities in August owing to high valuation of stocks and the unwinding of the Yen carry trade after Bank of Japan raised interest rates.

This investment was way lower than ₹32,365 crore in July and ₹26,565 crore in June, according to data with the depositories.

While September is likely to see continued interest from FPIs, the flows would be shaped by a combination of domestic political stability, economic indicators, global interest rate movements, market valuations, sectoral preferences, and the attractiveness of the debt market, Vipul Bhowar, Director Listed Investments, Waterfield Advisors, said.

According to the data with the depositories, Foreign Portfolio Investors (FPIs) made a net investment of ₹7,320 crore in Indian equities in August.

The fundamental reason for the poor FPI interest compared to the preceding two months is the high valuation in the Indian market. With Nifty trading at above 20 times estimated FY25 earnings, India is the most expensive market in the world now.

FPIs have opportunities to invest in much cheaper markets and, therefore, their priority is markets other than India, V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said.

Additionally, the unwinding of the Yen carry trade on August 24 significantly impacted FPI behaviour, leading to substantial sell off in Indian equities, Bhowar said.

This unwinding coincided with rising fears of a potential recession in the U.S. and disappointing economic data, which further exacerbated the market's reaction, he added.

Interestingly, FPIs have been selling in the secondary market, where valuations are perceived to be high, and redirecting their investments towards the primary market, which offers relatively lower valuations.

Meanwhile, FPIs infused ₹17,960 crore in the debt markets in August.

Experts believe that inclusion in global bond indices, attractive interest rates, stable economic growth, shift from equities, and favourable long-term outlook have been the key factors driving FPIs to invest in debt.

Investment in debt is led by index inclusion flows. It is since October last year when JP Morgan announced index inclusion, Vishad Turakhia, Managing Director at Equirus Securities, said.

India's inclusion in global bond indices and attractive yields have attracted flows, Nimesh Chandan, CIO, Bajaj Finserv Asset Management Ltd, said.

Also, FPIs are buying in the debt market mainly because the Indian Rupee (INR) has been stable this year and this stability is expected to continue, Geojit's Vijayakumar said.

With this FPIs investment in equities has reached ₹42,885 crore and ₹1.08 lakh crore in the debt market in 2024 so far.