After infusing funds in the last two months, foreign investors turned sellers again in September and pulled out over Rs 7,600 crore from the Indian equity markets amid hawkish stance by the US Fed and sharp depreciation in rupee.
With this, the total outflow by Foreign Portfolio Investors (FPIs) from the Indian equity markets has reached Rs 1.68 lakh crore so far in 2022, data with depositories showed.
FPI flows are expected to remain volatile in the coming months on slew of global and domestic factors, experts said.
"The UK government's expansionary fiscal policies amid elevated global inflation roiled the global currency markets and resulted in risk-off sentiment in equities," said Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities.
On the domestic front, there is some fuel related concerns, besides marginal drop in GDP estimates, he added.
According to the data, FPIs have sold equities worth a net Rs 7,624 crore in September. This came following a net investment of Rs 51,200 crore in August and nearly Rs 5,000 crore in July.
Prior to that, FPIs were net sellers in Indian equity markets for nine months in a row beginning October 2021.
Although FPIs started the month of September on a positive note, the pace of net flows was lower compared to August on the back of enhanced global uncertainty..
"Concerns over the aggressive rate hike by US Fed to control rising inflation, sharp depreciation in rupee, surge in US bond yields and fear of a global recession, fuelled pessimism among investors.
"Continuing Russia-Ukraine war also dented sentiments," said Himanshu Srivastava, Associate Director - Manager Research, Morningstar India.
The scenario turned adverse after hotter-than-expected inflation report dashed hopes that the US Federal Reserve would scale down its rate hikes in the coming months.
The August US inflation edged 0.1 per cent higher from the preceding month to 8.3 per cent. Inflation stood at 8.5 per cent in August last year.
In addition, a 75 basis points (bps) rate hike by the US Fed for the third consecutive time last month to control inflation and indication of further aggressive rate hikes have made investors risk averse. This has also raised concerns over the global economic growth and fanned fears of the US economy going into recession, Srivastava said.
Besides, sharp depreciation in the rupee also triggered FPI outflows. Rising bond yields in the US provided investors an opportunity to move away from riskier markets during these uncertain times and invest in safe havens like US treasuries, he noted.
"With the dollar strengthening hard in September, there is a rush towards the safety of the US dollar... Indian rupee may lose much more ground in coming times and hence an exit now and a re-entry later may make sense for some," said Alok Jain, smallcase manager and founder, Weekend Investing.
The FPIs may be exiting on pressures of redemption from emerging market funds of which India is a part, he added.
On the other hand, foreign investors have pumped in Rs 4,000 crore in the debt market during September.
Apart from India, FPI flow was negative for the Philippines, South Korea, Taiwan and Thailand, while it was positive for Indonesia during the period under review.