The huge sell-off by foreign investors contributed to the stock market crash last week when the Sensex plummeted by 1,850 points. Foreign investors pulled out over Rs 9,358 crore ($1.26 billion) from the Indian capital markets in the last four trading sessions on unabated fall in the rupee and rise in crude oil prices, according to figures available with NSDL.
The latest withdrawal comes following a net outflow of over Rs 21,035 crore from the capital markets (both equity and debt) in the month of September. With this, foreign investors had pulled out a whopping Rs 84,115 crore from Indian markets since April this year. FPIs have been withdrawing from emerging markets, including India, following the rate hikes by US Federal Reserve.
According to the latest depository data, foreign portfolio investors (FPIs) withdrew a net sum of Rs 7,094 crore from equities during October 1-5, Rs 2,261 crore from the debt market and Rs 3 crore from hybrid instruments, taking the total to Rs 9,358 crore. FPIs have been net sellers almost throughout this calendar year except a couple of months. However, the swiftness of the exit in October thus far has shaken the market, analysts said.
The BSE Sensex plunged 792.17 points to end at a near six-month low of 34,376.99, while the broader NSE Nifty dropped 282.80 points to 10,316.45 on Friday. This was the fifth straight weekly loss for the benchmark indices. The Sensex declined by a massive 1,850 points or 5.10 per cent, and the Nifty lost 614 points or 5.50 per cent, during the week.
The RBI maintained status quo on the benchmark interest rate in the monetary policy on Friday but warned that rising oil prices and tightening of global financial conditions pose substantial risks to growth and inflation. The central bank changed its policy stance to ‘calibrated tightening’ from ‘neutral’, while affirming its commitment to achieve the medium-term objectives to contain price rise. The markets were expecting the RBI to go for 25-50 basis points hike in Repo rate. The rupee touched a low of 74 on Friday in the wake of the RBI decision and FPI withdrawals.
“The status quo policy was quite surprising while under shooting inflation and recent fuel tax cut may give some leeway to the cautious sentiment. However, rupee weakened further and the market dived to new lows as risk of fiscal deficit and rise in US bond yield still impacting the outflow of foreign money,” said Vinod Nair, Head of Research, Geojit Financial Services.
“The RBI’s shift in stance indicates that they are prepared to act to support the rupee in case recent measures don’t stem further currency depreciation. The RBI and government seem to be walking a tight rope and if market sentiment worsens further and FPI outflows from the equity and fixed income markets continue, RBI may be forced to act by raising rates quickly,” said Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Adviser India.
The RBI has now has proposed a Voluntary Retention Route (VRR) to encourage foreign portfolio investors willing to undertake long-term investments in debt. Under the proposed route, FPIs will have more operational flexibility in terms of instrument choices as well as exemptions from regulatory provisions such as the cap on short-term investments (less than one year) at 20 per cent of portfolio size, concentration limits and caps on exposure to a corporate group (20 per cent of portfolio size and 50 per cent of a single issue). “This can incrementally be positive as and when it comes out. For now FPI sales in Debt market (YTD Rs 52,000 cr already) remains a significant concern,” Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund.