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Indian stock market was in a free fall on Monday along with other global markets, triggered by fears that the fast spread of Omicron cases and the resultant lockdowns will once again impede growth. European and Asian markets also lost between 1.5 and 2 per cent on Monday.
However, Indian market has been declining since mid-October, largely led by Foreign Portfolio Investors (FPIs) withdrawing funds from Indian equities.
While they net sold ₹13,550 crore in October, the net sales were relatively milder in November. But FPI selling has once again picked up pace in December, with net outflows of ₹13,470 crore so far this month.
Foreign investors were, however, net buyers in the first three months of this calendar and also brought large sums in June and September. So what’s changed for these investors and why are they selling now?
Highest-ever inflow
Indian equity markets have been in a stellar rally since March 2020, when the Sensex hit the low of 25,638. The Sensex has gained 142 per cent from there, until mid-October. While the ongoing correction has shaved off some of the profit, foreign investors are still holding on to sizable gains.
If we look at the yearly FPI inflows, 2020-21 received the highest ever inflow of ₹2,74,032 crore. It’s not surprising that some of that money is now being withdrawn, especially with Indian stocks getting extremely pricey compared with other emerging markets.
The US Federal Reserve announced last week that it will stop infusing fresh stimulus in to the US economy from next March and the Fed’s projections indicated 3 to 4 rate hikes of 25 basis points in 2022. This is negative for stocks since the higher yields will make money flow into bond markets.
Also, the extremely low rates of interest of G7 nations caused risky assets such as stocks, cryptocurrencies, SPACs etc to race higher. This was possible because traders could borrow at extremely low rates of interest and invest in these assets.
As rates move higher, these loans will be deleveraged and the assets bought with the funds need to be sold to repay the loans. The tendency is to typically sell assets which are overvalued.
Expensive valuation
A look at the global FPI flows shows that EMs such as Malaysia, South Korea, Brazil and Canada received net FPI inflows in December. This shows that FPIs have become more wary of Indian stocks, due to expensive valuation.
If we look at the country of origin of FPIs investing in India, most assets are held by FPIs from the US at ₹18,45,289 crore towards the end of November. These assets account for 45 per cent of the assets of the FPIs from the top 10 originating countries. Growing nervousness in the US about the Omicron variant and its impact on growth is, therefore, impacting FPIs from the US, resulting in large outflows from Indian market.
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