Foreign Portfolio Investment
Foreign Portfolio Investment (FPI) refers to the purchase by foreign investors of financial assets — such as equities, bonds, and money market instruments — in a domestic market, without acquiring a controlling interest in the issuing entities.
FPI (earlier referred to as FII — Foreign Institutional Investment — before SEBI's 2014 regulatory revamp) represented the cross-border capital flows that most directly influenced Indian equity and bond market prices on a day-to-day basis. Foreign portfolio investors included sovereign wealth funds, pension funds, mutual funds, hedge funds, endowments, and insurance companies registered with SEBI as FPIs and investing through designated custodians.
SEBI categorised FPIs into three categories based on regulatory risk. Category I included government-related entities, central banks, multilateral organisations, and highly regulated entities from FATF-compliant jurisdictions. Category II covered more broadly regulated institutional investors including mutual funds, insurance companies, and regulated pension funds. Category III (later merged into Category II) previously included entities with less transparent ownership structures. The categorisation determined the documentation requirements for registration and the permissible investment instruments.
FPI flows into Indian equities were one of the most closely tracked metrics in Indian capital markets. Net FPI equity flows were published daily by the National Securities Depository Limited (NSDL) and BSE. In years of strong global risk appetite and strong domestic earnings growth — such as 2012–2015 and 2020–2021 — FPIs were net buyers of Indian equities worth tens of thousands of crores. During risk-off episodes — the Taper Tantrum of 2013, demonetisation in 2016, COVID-19 in 2020, and global interest rate tightening in 2022 — FPIs turned net sellers, with outflows sometimes exceeding Rs 1–2 lakh crore over a few months.
The susceptibility of Indian markets to FPI flow volatility was a structural feature of an economy with liberalised capital markets and a relatively shallow domestic institutional investor base. Over the 2016–2024 period, the growth of domestic mutual funds (through SIP inflows) and domestic insurance and pension funds (EPFO, NPS) progressively increased the "stickiness" of domestic capital, reducing the percentage of total market capitalisation held by FPIs from around 24–25 percent at the 2014 peak to approximately 17–18 percent by 2024, even as absolute FPI holdings in rupee terms remained large.
On the debt side, FPIs could invest in Indian government securities (G-Secs) under a general limit (capped as a percentage of total outstanding government debt), Fully Accessible Route (FAR) bonds (introduced in 2020 with no limit for certain G-Sec maturities), corporate bonds, and short-term money market instruments. RBI and SEBI periodically adjusted the limits and conditions based on the macroeconomic environment and India's external vulnerability assessment. India's inclusion in global bond indices — JPMorgan GBI-EM starting June 2024 — was expected to attract sustained passive FPI inflows into G-Secs over a multi-year period.