FPI fund flight over trade war fears increases pressure on Rupee

According to FPI fund flow data sourced from CDSL, the net outflows in the calendar 2018 (till June 28) aggregated to an all-time high of Rs 46,195 crore, even higher than the outflow of Rs 41,216 crore witnessed in 2008 — during global financial crisis.

Written by Sandeep Singh | New Delhi | Updated: June 29, 2018 5:42:47 am
FPI fund flight over trade war fears increases pressure on Re Domestic currency hits all time intra-day low on Thursday. (Illustration: CR Sasikumar)

Rise in outflows by foreign portfolio investors on the back of rising trade war tension between the US and China and prevailing high global crude oil prices, which hit $77.69 per barrel on Thursday, pushed the rupee to an all-time low of 69 against the dollar Thursday. While rupee hit an intraday low of 69.08, it pulled back to close at 68.79 on likely sale of dollars by the RBI.

According to FPI fund flow data sourced from CDSL, the net outflows in the calendar 2018 (till June 28) aggregated to an all-time high of Rs 46,195 crore, even higher than the outflow of Rs 41,216 crore witnessed in 2008 — during global financial crisis.

While the trend in outflows strengthened in April 2018 on the back of rising yields of US Treasury, the rise in crude oil prices and concerns over protectionism following growing tension between US-China trade war on fuelled the outflow in the following months.

However, majority of the outflow seen in 2018 is from the debt market. The outflow from the debt market stood at 40,437 crore, accounting for over 87 per cent of the total outflows seen in the calendar. Experts say that while rise in US treasury yields led to flight of capital from Indian debt initially, rise in interest rates in the Indian economy have also played its role. RBI announced to hike the repo rate by 25 basis points earlier this month and there are expectations that the RBI may raise the rates further in coming months.

“Debt has seen an outflow. At a time when the interest rates are rising the duration debt doesn’t make sense and they only make sense when there is a rate cut cycle,” said Sonam Udasi, fund manager with Tata Mutual Fund.

While May witnessed a net outflow of Rs 29,775 crore from the Indian equity and debt markets, the net outflow in June was Rs 14,118 crore.

Experts feel that the trend of outflow of funds from the debt market is likely to continue as interest rates are likely to go up further in the Indian market, with rising crude oil prices posing a challenge to inflation numbers.

If last three months have seen a sharp rise in outflows, the first three months of calendar 2018 witnessed a net FPI inflow of Rs 13,239 crore into the Indian markets – Rs 14,013 crore into equities and a net outflow of Rs 774 crore from debt markets.

Market experts feel that while any easing of trade tensions between US and China would be perceived as positive by the market, any escalation in the tension and retaliation by China against the newly imposed tariffs by the US, may only raise the outflow of funds from emerging economies and may lead to weakening of their currencies against the dollar.

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