The seven-month-long sell-off by foreign portfolio investors (FPIs) in Indian markets seems to be abating. After pulling out over Rs 2.55 lakh crore since December 2021, FPIs have turned net buyers in India in July so far, bringing some relief to the bear-hit stock markets.
FPIs have invested Rs 870 crore in domestic markets so far this month, after withdrawing Rs 51,422 crore in June and Rs 36,518 crore in May this year.
According to NSDL data, in July, FPI net investment in equity was Rs 1,099 crore and Rs 792 crore in debt, but they took out Rs 926 crore from debt-VRR (voluntary retention route).
Analysts said there is a clear change in FPI action in the market. “The relentless selling by FPIs which started from October 2021 appears to be over. They have significantly slowed down selling in July and have even turned buyers for 5 days in July, particularly during the last few days when they continuously bought,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. The dollar index, which had moved above 109, was down at 106.55 on Friday. This is one of the factors to have contributed to the change in FPI strategy, he added.
The FPI sell-off is being attributed to the tightening of the monetary policy by the US Federal Reserve, which has been on a rate hiking spree to control inflation. Other central banks, including in the UK and Eurozone, are following suit. An analyst said, “Relatively high valuations in India, rising bond yields in the US, an appreciating dollar and concerns regarding the possibility of a recession in the US triggered by aggressive tightening are factors behind FPI pullout.”
When the global economy took a hit, central banks across the world slashed interest rates and announced liberal monetary policies. While this helped the economies to recover and led to higher consumption, the surplus liquidity in the financial system led to a big worry: inflation.
With inflation rising to new levels in major economies like the US and Eurozone, central banks have started tightening the monetary policies and hiking interest rates. In India, inflation surged to an eight-year high of 7.79 per cent in April, prompting the Reserve Bank of India (RBI) to hike repo rate by 90 basis points to 4.90 per cent. Retail inflation was at 7.01 per cent in June, much above the RBI’s upper tolerance limit of 6 per cent. In fact, inflation has risen to multi-decade highs across several economies.
Holding of FPIs (in value terms) in companies listed on NSE stood at Rs 51.99 lakh crore as on March 31, 2022, a fall of 3.36 per cent from Rs 53.80 lakh crore as on December 31, 2021, due to the sustained sell-off since October 2021. FPIs hold sizeable stakes in private banks, tech companies and big caps like Reliance Industries. The US accounts for a major chunk of FPI investments at Rs 17.57 lakh crore as of May 2022, followed by Mauritius (Rs 5.24 lakh crore), Singapore (Rs 4.25 lakh crore) and Luxembourg (Rs 3.58 lakh crore), according to data available from NSDL.
The recent Sebi decision to allow FPIs in commodities derivatives market is expected to boost inflows. “As India grows and aspires to become a $5-trillion economy, opening the gates for foreign investors and allowing FPIs to participate in the exchange traded commodity derivatives will not only aide in integrating Indian commodity markets at par with the global markets but also facilitate in managing pricing gaps and enhance liquidity in the markets,” said Manoj Purohit, partner & leader—financial services tax, BDO India.
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He said the Sebi has struck the right chord at a time when the FPIs were steadily pulling out cash triggered by many global, economic, political and market-driven factors. “This announcement will act as a positive breather amidst the global turmoil capital markets are facing.”
With the rupee remaining under pressure, India’s foreign exchange reserves fell by another $7.54 billion to $572.71 billion during the week ended July 15, amid appreciation of the dollar and capital outflows from India triggered by the rise in inflation and rate hikes by the US.