Demonetisation effect: FPI outflow in November hits over 3-year high

The outflow in November was driven by growing expectations of a rise in US Fed rate in December, recovery in the US economy.

Written by Sandeep Singh | New Delhi | Updated: December 2, 2016 12:50 pm

The net foreign portfolio investment outflow for the month of November hit a 41-month high as the total outflow from both debt and equity markets aggregated to Rs 39,395 crore or $5.78 billion. This is the highest outflow in a month after the record flight of Rs 44,161 crore witnessed in June 2013 following the US Fed’s announcement to taper its quantitative easing program.

The outflow in November was driven by growing expectations of a rise in US Fed rate in December, recovery in the US economy, FCNR redemption pressure and the government’s currency move. The outflow has been both from the debt and equity markets and amounted to Rs 18,244 crore and Rs 21,151 crore respectively. As a result, the net fund flow (aggregate of debt and equity) for the calendar 2016 has slipped into negative to Rs 7,869 crore.

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The outflow of FPI money resulted into significant depreciation of rupee. A report released by SBI on Thursday said that while rupee hovered around Rs 67 per dollar since July this year, it took a sharp turn in November after high denomination currency notes were demonetised. The currency has lost around 3 per cent against the US dollar since then. While it fell to a low of 68.86 on November 24, on Thursday, it closed at 68.34.

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The SBI report prepared by Soumya Kanti Ghosh, its group chief economic adviser, reassures that rupee will witness favourable movement once the demonitisation process is completed. There are, however, concerns that a decline in 10-year yield differential between the US and India from an average of 584 bps to 390 bps now may increase the chance of a sustained capital outflows.

“… Once the process of demonetisation is complete and the system becomes stable there is a possibility of favourable movement in rupee. The FCNR(B) redemption is over by end November.,” said the report.

Even in June 2013, the rupee had come under severe pressure. The month had witnessed panic sell-off after Ben Bernanke’s announcement on tapering of the quantitative easing through which US Federal Reserve purchases bonds worth $85 billion every month.