Foreign investors have pulled over Rs 6,400 crore from the Indian equity market in the first four trading sessions of the ongoing month when the Reserve Bank of India (RBI) and US Federal Reserve raised interest rates.
Given the headwinds in terms of elevated crude prices, inflation, tight monetary policy among others, FPIs' flows in India are expected to remain volatile in the near term, Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities, said.
Foreign Portfolio Investors (FPIs) remained net sellers for seven months to April 2022, withdrawing a massive amount of over Rs 1.65 lakh crore from equities. This was largely on the back of anticipation of a rate hike by the US Federal Reserve and due to the deteriorating geopolitical environment following Russia's invasion of Ukraine.
After six months of selling spree, FPIs turned into net investors in the first week of April amid correction in the markets and invested Rs 7,707 crore in equities. After a short breather, once again they turned net sellers during the holiday-shortened April 11-13 week, and the sell-off continued in the succeeding weeks too.
FPI flows continue to remain negative in the month of May till date and they have sold around Rs 6,417 crore during May 2-6, data with depositories showed. The trading in market was closed on May 3 on account of Eid.
"With central banks across the world pressing the panic button and increasing interest rates, equity markets have also reciprocated the sentiment. Foreign investors continue to sell relentlessly," Vijay Singhania, Chairman, TradeSmart, said.
Making similar statement, Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said the week turned out to be an eventful one. RBI in an off-cycle monetary policy review on May 4 hiked the policy repo rate by 40 bps with immediate effect and cash reserve ratio by 50 bps effective May 21. This attracted a sharp reaction from the markets which have been on a downward spiral ever since.
On the other hand, the US Fed too raised rates by 50 bps on the same day, the biggest hike in two decades. Among investors, it fanned fears that going ahead, further large rate hikes are likely to come, he added.
Further, the Bank of England lifted its key rate to the highest level since 2009. Also, the market expects that Britain could see inflation at 10 per cent. Additionally, concerns over COVID-19 in China could upset global supply chains and hit growth. This makes foreign investors move back to its home country, Chouhan said.
Apart from equities, FPIs withdrew a net amount of Rs 1,085 crore from the debt market during the period under review.
Going forward too, market volatility is expected to remain high as foreign investors may continue to withdraw funds. Unless the war is called off, selling is expected to continue, TradeSmart's Singhania said.
According to Morningstar's Srivastava, there is nothing much at the moment, which could cheer up foreign investors and coax them to invest in Indian equity markets.
"Besides the rate hikes by both RBI and US Fed, uncertainty surrounding Russia-Ukraine war, high domestic inflation numbers, volatile crude prices and weak quarterly results does not paint an incredibly positive picture. The recent rate hikes could also slow the pace of economic growth, which is also a concern," he said.
Adding to the worry is the resurgence of coronavirus cases in China and in some other parts of the world. In such a scenario, FPIs typically turn risk-averse and adopt a wait and watch approach until greater clarity emerges, he added.
Under the given circumstances and fast-changing global landscape, foreign flows into Indian equities could continue to be under pressure, until there is a change in the underlying drivers and investment scenario, he added.
Apart from India, other emerging markets, including Taiwan, South Korea and the Philippines witnessed outflows in the month of April to date.