Continuing their massive selling spree for the ninth consecutive month, foreign investors dumped Indian shares worth Rs 50,203 crore in June -- the highest net outflow in over two years -- amid aggressive rate hike by the US Federal Reserve, elevated inflation, and relatively higher valuation of domestic equities.
Foreign portfolio investors (FPIs) have now pulled out around Rs 2.2 lakh crore from domestic equities in the first six months of 2022 -- the highest-ever net withdrawal by them. Before that, FPIs withdrew Rs 52,987 crore in the entire 2008, data with depositories showed.
The massive capital outflow has also contributed to the depreciation in the rupee, which breached the 79-mark against the US dollar for the first time last week.
Analysts warn that FPI flows are likely to remain volatile in the near term.
"Going ahead, we believe inflation would be the key driver to monitor to decide the trend, coupled with narrowing yield gap between bond and equities...," said Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities.
According to the data, FPIs withdrew a net sum of Rs 50,203 crore from equities in June. This was the highest net outflow since March 2020, when they had pulled out Rs 61,973 crore.
FPIs have been deserting Indian equities since October 2021.
"Aggressive rate hike by US Fed, high inflation as well as relatively higher valuation of Indian stocks continued to keep foreign investors at bay through the month of June," said Himanshu Srivastava, Associate Director - Manager Research, Morningstar India.
According to him, the broader sentiment remained negative towards India, which prompted foreign investors to carry forward their cautious stance on domestic equities. Compared to other emerging markets, India is among the worst hit with respect to net outflows.
"The relentless FPI selling has to be seen in the context of a steadily rising dollar and bond yields in the US. FPIs are selling more in countries with rising current account deficits (CAD) like India because the currencies of such countries are vulnerable to further depreciation," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Towards the end of June, FPI selling witnessed a declining trend. If the market rises in July, anticipating or responding to good first quarterly results, FPIs may sell again. This trend will be halted only when the dollar stabilizes and US bond yields decline, he added.
Vijay Singhania, chairman of TradeSmart, said the equity markets seem to be impacted by the hammering of currencies, especially Asian market currencies.
"The quarter ended June recorded one of the worst performances since the 1997 Asian currency crisis. As if this was not bad enough, India was the worst-performing currency in Asia," he added.
Given the risk emanating from prolonged inflation, global central banks are moving towards normalizing interest rates and quantitative tightening at a rapid pace, said Kunal Valia, Chief Investment Officer - Listed Investments, Waterfield Advisors.
In such a scenario, where not just the cost of capital is going up, but the liquidity trap is also drying up, outflows from emerging-market assets are leading to excess volatility and drawdowns, he noted.
Apart from equities, FPIs were net sellers in the Indian debt market too last month. They were net sellers to the tune of Rs 1,414 crore in June, which, however, was significantly lower than May's figure of Rs 5,505 crore.
"Broadly, from the risk-reward perspective and with interest rates rising in the US, Indian debt doesn't appear to be an attractive investment option for foreign investors," Morningstar's Srivastava said.
In addition to India, FPI flows in June were negative in other emerging markets like Indonesia, Philippines, South Korea, Taiwan, and Thailand, he added.