Foreign portfolio investors continued their selling spree, withdrawing 2.2 lakh billion rupees from the Indian equity market in the first half of 2022.
Continuing their hefty selling spree for the ninth month in a row, foreign investors withdrew around 50,203 crores from the Indian equity market in June. Foreign portfolio investors (FPIs) have now withdrawn around Rs 2.2 lakh crore from the domestic market in the first six months of 2022. This represents the highest-ever net withdrawal by them and comes amid an aggressive spike in inflation and a continuous rise in rates by the US federal.
This was the largest net outflow since March 2020, when they pulled out Rs 61,973 crore from the Indian market. Foreign portfolio investors (FPIs) have also started pulling out money from the debt market. A net sum of around 2,503 crore Indian rupees was pulled out from the debt market so far this year. Since the month of February, they have not stopped taking money out of the debt market.
The massive outflow of capital has also been a contributing factor in the devaluation of the rupee, which surpassed the mark of 79 per US dollar for the very first-time last week. The US FED’s ongoing rate hikes are among the main causes of the market exodus from India.
The Federal Reserve of the United States has already increased interest rates twice this year to combat the escalating inflation that has been brought on by the disruption in the supply chain caused by the conflict between Russia and Ukraine. Investors are acting cautiously for several reasons, one of which is the concern that rising inflation may reduce company profitability and may influence consumer purchasing.
According to Vijayakumar of Geojit Financial Services, the primary factors that are driving money to be withdrawn from the Indian market by foreign portfolio investors are the strengthening of the US currency and the growing bond rates. Because the currencies of countries with expanding current account deficits (CAD), like India, are susceptible to further depreciation, foreign portfolio investors (FPIs) are selling more of their holdings in such countries, added Mr. Kumar.
The valuation of domestic stock markets, which remains at a premium in comparison to other comparable markets after the recent downturn, is an additional significant factor that has contributed to the flight of investors from domestic stock markets. This has also resulted in international investors booking profits here and diverting their attention towards other markets, which are appealing both in terms of their valuation and the risk-reward profile.
Given the threat posed by persistent inflation, global central banks are moving swiftly toward normalizing interest rates and quantitative tightening. In this environment, when both the cost of capital and the liquidity trap are increasing, outflows from emerging-market assets are causing excessive volatility and drawdowns.
Nonetheless, some experts feel that the considerable selling by FIIs might halt if the monetary policy tightening is stabilized. The pattern of interest rates in other nations would have a substantial impact. Other market experts are of the view that corrections in the prices of crude oil and commodities will likely halt or at least restrict FII withdrawals from the domestic equity market.
Analysts believe that a future increase in interest rates may not be as severe as predicted, given the decline in commodity prices and sluggish demand. This downtrend in FIIs’ behaviour may not linger in the market beyond this year.
