March 27, 2021 9:30:50 am
As a fresh spike in Covid cases and rise in bond yields in the US and other developed markets raised investor concerns, foreign portfolio investments (FPI) in domestic equities slowed significantly in March.
With two more trading days to go in the month, net inflow into equities stood at a six-month low of Rs 10,557 crore. By comparison, the average monthly FPI inflow into equities between October 2020 and February 2021 amounted to Rs 37,435 crore.
Weak FPI inflow in March has also had a bearing on the markets. The benchmark Sensex has remained flat this month. In fact, from its peak closing of 52,154 on February 15, 2021, the index is now down 3,146 points, or 6 per cent.
FPI inflows have fallen in March even though the US Federal Reserve last week said it would continue the flow of credit to households and businesses, and support the economy. It also indicated that there may not be any interest rate hike through 2023.
“I feel that the FPI flows have been largely impacted by bond yields. Rise in Covid cases is not such a big concern as now everyone knows that even if the cases rise, it can’t paralyse the economy the way it did earlier,” said CJ George, MD, Geojit Financial Services.
He added that inflows slow down as valuations become rich, and, so, FPIs would now wait for the March quarter results before they invest big money. “Valuations are not the same as they were six months ago, and so they may wait for the March quarter results to park fresh money.”
FPI inflows into equities started to rise in October in line with improvement in economic fundamentals and decline in Covid numbers. However, it gathered significant momentum in November and December when the FPIs invested a net of over
Rs 60,000 crore in each of these months — the highest ever in a month till date.
The jump in November and December came in line with positive news flows including the outcome of the US presidential election, rise in economic activity and GDP growth projections, and successive announcements of high efficacy of Covid-19 vaccine candidates.
The sharp rise in FPI flows into emerging markets was also a result of huge liquidity in world markets, which was an outcome of big stimulus packages announced by the US and other countries to support their respective economies that were hit hard by the Covid-19 pandemic.
Not only equities, even domestic debt has witnessed a reduction in FPI participation. In March till date, FPIs have pulled out a net of Rs 7,269 crore from domestic debt. This is the biggest outflow since May 2020, when they pulled out a net of Rs 22,935 crore from the debt market.
FPI flows played a big role in the returns generated by equity markets. While the Sensex rose 4 per cent in October following FPI inflows of Rs 19,541 crore during the month, it jumped 11.5 per cent and 8 per cent on November and December respectively as FPI flows crossed Rs 60,000 crore in each month.
January witnessed a fall of 3 per cent in the Sensex, despite FPI flows amounting to Rs 19,473 crore, as market participants were cautious, waiting for Budget announcements.
Overall, the financial year 2020-21 has seen record FPI inflows, and with two more trading days to go in the year, FPI flows in domestic equities has hit a record of 2,74,108 crore.
The previous best was almost half at Rs 140,033 crore seen in 2012-13. Debt markets, however saw a net outflow of Rs 51,221 crore during the financial year.
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