Inflows into equities from domestic institutional investors (DIIs) rose to the highest in three months in August while flows from foreign portfolio investors (FPIs) saw a marked slowdown due to rising valuations and global volatility.

DIIs invested around Rs 48,280 crore in equities during the month, compared with Rs 23,486 crore in July and Rs 35,845 crore in June.

Comparatively, FPIs invested $873 million (Rs 7,320 crore) in August, much lower from the previous two months, as high valuations and volatility in global equities in the first half triggered caution.

Moreover, FPI inflows in August were on account of a strong primary market. If one were to exclude primary market inflows, FPIs were sellers of shares worth $662 million (approximately Rs 5,551 crore), according to data.

A similar trend was witnessed in earlier months as well where FPIs were selling in the secondary market and redirecting their investments towards the primary market, pointed out Vipul Bhowar, director, listed investments, Waterfield Advisors. “This shift in the investment strategy, coupled with lacklustre earnings reports from critical sectors, may have further discouraged FPIs from maintaining their positions in Indian equities,” Bhowar said.

The volatility induced by yen carry trade unwinding and worries of a potential US recession in the first half of the month might have also soured the investor sentiment in August.

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Valuations have been one of the biggest factors behind FPI outflows from Indian equities, according to experts. “The fundamental reason behind the poor FPI interest is the high valuation in the Indian market… FPIs have opportunities to invest in cheaper markets, and therefore, their priority is markets other than India,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

Benchmark Nifty and Sensex rose 1.1% and 0.8%, respectively, in August, registering third consecutive monthly gains. Gains were fuelled by hopes of a rate cut by the US Federal Reserve in this month’s policy meeting. While this has led to decent inflows from FPIs in the last few sessions, analysts expect more volatility in flows amid high valuations.