Factors triggering 1.09 lakh crore plus FPI sell-off

The prevailing sentiment becomes bearish for foreign investors in India

In the aftermath of the Russia-Ukraine war, the prevailing sentiment has become bearish for foreign investors in India.  In just three trading days in March, foreign portfolio investors (FPIs) withdrew Rs 17,537 crore from Indian markets.

According to numbers from Bloomberg , foreign portfolio investors (FPIs) have net sold domestic shares worth Rs 1.09 lakh crore ($14.6 billion) since October; they withdrew in seven of the fiscal year’s eleven months. According to data from NSDL, the net outflow of Rs 1.29 lakh crore from stocks so far in the 2021-22 financial year has been the highest on record.  A further ₹4,500 crore has been withdrawn by FPIs from Indian equities in April. To a degree, the selling pressure from FPIs has been mitigated by robust domestic investments.  The sell off in April follows a net investment of Rs 7,707 crore by foreign portfolio investors (FPIs) between April 1 and 8, as a market correction presented a decent purchasing opportunity, according to statistics from depositories.

So, why are foreign portfolio investors (FPI) acting as net sellers for most of the calendar year.  Let’s take a closer look at some key contributing factors to FPIs and even to a degree FIIs losing interest in Indian markets:

Macroeconomic conditions:  The exit of foreign investors is mostly due to inflationary pressures and worsening global macroeconomic conditions as a result of the Russia-Ukraine conflict. For the sixth month in a row, foreign institutional investors have sold their holdings in the Indian equity market on a net basis. Because India is a big importer, foreign portfolio investors (FPIs) are concerned that commodity price increases may have a greater impact on India.

While the Russian-Ukraine conflict has had a limited impact on the Indian economy due to our lower reliance on imports from these countries, higher commodity inflation poses a significant risk in terms of macroeconomic parameters such as balance of payments and inflation, as well as corporate earnings estimates due to higher input costs.

Since October, the largest outflows have been in financial services (including banks), followed by information technology, and household and personal items.

Fed Rate Hike and falling rupee:  The FPI selloff coincided with a global stock market selloff triggered by fears of the Federal Reserve raising interest rates. Furthermore, recent inflation figures for India were higher than expected, dampening the mood for FPIs even more. The RBI is also perceived to be tightening its stance, which might put pressure on equity markets as per various news reports.

Recent comments by US Fed members have fuelled speculation that the US central bank may raise rates by a larger amount than previously thought to contain the country’s out-of-control inflation. In the backdrop of the ensuing Russia-Ukraine War, for the first time since 2018, the US Fed raised rates by a quarter percentage point in March. This move signals the end of a shift in the US monetary policy and the start of a series of potential rate hikes in the current year. The Fed is largely expected to raise rates by 50 basis points at its next meeting in May, following a 25-basis-point boost in March.

Higher interest rates in the world’s most powerful economy reduce the appeal of assets in riskier emerging markets like India.

Domestic silver lining: Domestic investments, on the other hand, have helped to mitigate the FPI selling pressure. Between October and February, domestic mutual funds invested a total of Rs 98,624 crore in Indian stocks.  The tightening RBI norms may also have played a role in the FPI selloff as global inflation rises steadily.  However, if this trend continues, there may be a limit to how much more liquidation can be absorbed at the current prices. Another facet to consider is that if the Russia-Ukraine crisis abates and the geopolitical normalcy resumes then it could lead to FPIs becoming buyers again on a large scale.  India fights itself on the cusp of significant economic change and the FPI sentiment could make or break India’s business transformation ambitions.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of ET Edge Insights, its management, or its members

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