The outflow trend for foreign portfolio investors (FPIs) continued in May as they have drawn over Rs 6,400 crs from the Indian market in the first four trading sessions of the month. This is mainly due to the Reserve Bank of India (RBI) and US federal rate hikes.
For seven months until April 2022, FPIs have remained net sellers and have withdrawn a massive amount of over Rs 1.65 lakh crore from equities, a news agency PTI said in the report.
The outflow was mainly in the midst of expectations of an interest rate hike from the US Federal Reserve and due to the deteriorating geopolitical environment following Russia’s invasion of Ukraine, the report added.
Shrikant Chouhan, Head – Equity Research (Retail), Kotak Securities, said FPIs’ flows in India are expected to remain volatile in the short term given the headwinds in terms of, among other things, rising crude oil prices, inflation and tight monetary policy.
In the first week of April, FPIs turned into net investors after six months of sales frenzy amid market correction, investing Rs 7,707 in equities.
After a short respite, they again became net sellers in the shortened holiday week 11-13 April, and sales continued in the following weeks as well.
FPI flows continue to remain negative in the month of May to date and they have sold around 6,417 crore Rs during 2-6. May, showed data with depositaries. Trading in the market was closed on May 3 due to Eid.
“With central banks around the world pressing the panic button and rising interest rates, stock markets have also reciprocated the mood. Foreign investors continue to sell relentlessly,” said Vijay Singhania, chairman of TradeSmart.
In a similar statement, Himanshu Srivastava, Associate Director – Manager Research, Morningstar India, said the week turned out to be an eventful week. RBI in an off-cycle monetary policy review on 4 May raised the political reporent by 40 bps with immediate effect and the liquidity reserve ratio by 50 bps with effect from 21 May.
This attracted a sharp reaction from the markets, which has been in a downward spiral ever since, he added.
On the other hand, the US Federal Reserve also raised interest rates by 50 bps on the same day, the largest increase in two decades. Among investors, it raised fears that further large rate hikes are likely to come in the future, he added.
In addition, the Bank of England raised its key interest rate to its highest level since 2009. The market also expects the UK to see inflation of 10%.
In addition, concerns about COVID-19 in China could disrupt global supply chains and hit growth. This causes foreign investors to move back to their home country, Chouhan said.
Apart from equities, FPIs withdrew a net amount of Rs 1,085 crore from the debt market during the period under investigation.
Also in the future, market volatility is expected to remain high as foreign investors can continue to withdraw money. Unless the war is called off, sales are expected to continue, TradeSmarts Singhania said.
According to Morningstar’s Srivastava, there is not much at the moment that could cheer foreign investors up and entice them to invest in Indian stock markets.
“In addition to the rate hikes from both the RBI and the US Fed, the uncertainty surrounding the war between Russia and Ukraine, high domestic inflation figures, volatile crude oil prices and weak quarterly results do not paint an incredibly positive picture. a concern, “he said.
Increasing concern is the resurgence of coronavirus cases in China and in some other parts of the world. In such a scenario, FPIs typically become risk-averse and adopt a wait-and-see approach until greater clarity emerges, he added.
Under the given circumstances and rapidly changing global landscape, foreign flows to Indian equities may continue to be under pressure until there is a change in the underlying drivers and investment scenario, he added.
Apart from India, other emerging markets including Taiwan, South Korea and the Philippines have experienced outflows in the month of April to date.
(With PTI inputs)