FPIs dump stocks worth Rs 20,479 cr in 2 days

The FPI selloff started after Christopher J Waller, Governor, Federal Reserve System on Tuesday suggested that there was less urgency for a rate cut. Investors were earlier expecting that the reduction in interest rate by the US Fed would start from March this year. Foreign investors tend to stay away from India when the US yield rises, policy rates there remain high and stocks in India  become overvalued. US yield has already crossed the four per cent level raising concerns in emerging markets like India. “When the rates remain high in the US, they prefer to stay invested there,” said an analyst with a broking firm.

After falling 1,628 points on Wednesday, the BSE Sensex fell another 313.90 points or 0.44 per cent to settle at 71,186.86 as FPIs pressed sales. The Nifty declined 109.70 points or 0.51 per cent to 21,462.25 on Thursday.

Domestic institutional investors, who are contrarians, bought stocks worth Rs 9,900 crore in the last two days but it was not enough to prevent the slide in the market.

The actions of FPIs, considered as hot money, has been volatile in the last few years. FPI flows into India witnessed a turnaround in 2023, registering inflows of US$ 28.7 billion compared with outflows of $ 17.9 billion in 2022. In fact, inflows in 2023 were the highest since 2017, when FPIs poured in $ 30.8 billion in the domestic market. However, true to their nature, FPI flows exhibited a great deal of volatility throughout the year. While the first quarter of the calendar year was marked by outflows to the tune of $ 3 billion, this was more than compensated by inflows of over $ 14 billion in the next quarter. There was a steady moderation in FPI inflows thereafter. This coincided with increased uncertainty over the future Fed rate trajectory, with most investors banking heavily on the Fed’s higher for longer narrative,  a Bank of Baroda report said.

The primary drivers of FPI movement in India has been market perception of the trajectory of Fed rates and the strong performance of India Inc. The year started with most market participants believing that the Fed is likely to remain aggressive while hiking rates amidst persistently high inflation and continued strength in the labour market, it said.

The latest Fed commentary has remained hawkish, signalling that a rate cut may not come through in the near future. Market expectations were belied about the timing of a rate cut, leading to the FPI pullout.

When the Fed tightens or cuts the policy rates, interest rates tend to rise or fall accordingly in emerging markets. While it is not necessary that the RBI will blindly follow the Fed and other central banks in hiking rates, interest rates in India have, in fact, moved in tandem with rates in the US. While most central banks, including the RBI, have been raising rates to tame inflation, the RBI considers domestic factors, especially retail inflation, while reviewing interest rates.