Foreign investors continue to be cautious about the Indian equity market and have pulled out over Rs 7,400 crore this month so far amid sustained strengthening of the dollar and increasing concerns over a recession in the US. This comes following a net withdrawal of Rs 50,203 crore from equities in June. While foreign portfolio investors (FPIs) have slowed down their pace of selling, this does not indicate a change in trend as there has not been any significant improvement in the underlying drivers, said Himanshu Srivastava, Associate Director – Manager Research, Morningstar India.
There has been an exodus of foreign funds from the Indian equity market over the last nine months. “Given the uncertainty in the forex market and the sustained strengthening of the dollar, FPIs are unlikely to turn aggressive buyers in the Indian market and at higher levels they may again turn sellers,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Going forward, FPI flows will remain volatile in the emerging markets on account of rising geopolitical risks, rising inflation and tightening of monetary policy by central banks, Shrikant Chouhan, Head – Equity Research (Retail), Kotak Securities, said. According to data with depositories, FPIs pulled out a net amount of Rs 7,432 crore from Indian equities during July 1-15. While there have been sporadic net inflows by FPIs last week, the broader trend continues to be cautious, Srivastava added.
FPIs withdrew a net 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. With the latest pull out, net outflow by FPIs from equities this year so far has reached around Rs 2.25 lakh crore — a record high. Before this, they withdrew Rs 52,987 crore in the entire 2008, data showed.
According to Chouhan, Indian equities witnessed weakness as global inflation prints remained elevated, concerns of US recession increased, dollar index continued its sharp rally and Q1 results of large IT companies were weaker than expected. Rupee has touched the psychologically key 80 per dollar mark briefly during the week, highlighting the trouble RBI faces on controlling the currency, said Vijay Singhania, chairman of TradeSmart. Most central bankers are struggling in this currency war which is a collateral damage of the war in Europe, where the euro is now at par with the dollar, suggesting the Euro zone is staring at a deeper recession than the US, he added. Under such circumstances, foreign investors withdrawing money comes as no surprise, Singhania said. According to Vijayakumar, a positive development from the Indian market perspective is the strength of the retail investor segment.
Retail investors — directly and through domestic institutional investors (DIIs) — are absorbing the FPI selling, thereby preventing a crash in the market. FPI selling has depressed the prices of high-quality financials, particularly those of leading banks. This is a good opportunity for long-term investors with an investment time horizon of more than three years, he added.
In addition to equities, FPIs withdrew a net amount of Rs 879 crore from the debt market during the period under review. From the risk-reward perspective and with interest rates rising in the US, Indian debt does not appear to be an attractive option for foreign investors, Srivastava said. There have been intermittent weekly net inflows, but that could largely be attributed to FPIs parking investments from a short-term perspective in the wake of ongoing uncertainties, he added.