Private lenders have faced the maximum brunt of the record foreign fund outflow from Indian equities since October 2021. This was evident from the sharp decline in foreign institutional holding across major private lenders at the end of the first quarter of FY23.

Foreign portfolio investors (FPIs) stake in the country’s largest private sector lender, HDFC Bank, fell by over 7 per cent year-on-year to 32.31 per cent as of June 2022. Their stake in mortgage lender HDFC also fell to 67.75 per cent as of June 2022, from 72.22 in June 2021. The HDFC twins were historically the most-favoured stocks for foreign investors. 

Foreign investor stake in ICICI Bank also went down to 43.54 per cent in the latest quarter from 48.01 per cent in June 2021, while FPIs have cut nearly 6 per cent stake in Axis Bank to 46.58 per cent as of June 2022. Kotak Mahindra Bank saw the lowest reduction in FPI holding, which fell to 40.55 per cent (42.77 per cent) as of June 2022.

Portfolio realignment

Market experts attribute the decline in FPI holdings in private lenders to portfolio realignment and not due to any concerns over structural headwinds in the sector. 

“The reason why FPIs have been selling in financial services, particularly banks, is that the sector accounts for 33 per cent of the total FPI AUC (assets under custody). They have been sitting on good profits in this segment and it is easy to sell large quantities in this highly liquid segment,” said VK Vijayakumar, Chief Investment  Strategist, Geojit Financial Services.

FPIs have been sellers of Indian equities between October 2021 and June 2022, pulling out over ₹ 2.59 lakh crore during the nine months. The banking and financial services sector alone saw an outflow of ₹ 1.09 lakh crore or 43 per cent of the total FPI outflow during the period.