Continuing its heavy selling spree for the eighth consecutive month, foreign investors pulled out nearly ₹40,000 crore from the Indian equity market in May on fears of an aggressive rate hike by US Federal Reserve that dented investor sentiments.

With this, net outflow by foreign portfolio investors (FPIs) from equities reached at ₹1.69-lakh crore so far in 2022, data with depositories showed.

Going ahead, FPI flows will remain volatile in the emerging markets on account of rising geo-political risk, rising inflation, tightening of monetary policy by central banks, among others, Shrikant Chouhan, Head-Equity Research (Retail), Kotak Securities said.

According to the data, foreign investors withdrew a net amount of ₹39,993 crore from equities in May. This massive outflow is the major factor for the weakness in the Indian market.

Himanshu Srivastava, Associate Director-Manager Research, Morningstar India, attributed the latest sell-off to concerns over the prospects of more aggressive rate hike by US Fed going ahead.

Supply chain disruption

US Fed has hiked rates twice this year to battle surging inflation caused by the disruption in supply chain due to the war between Russia and Ukraine.

"Additionally, there are concerns of uncertainty on the ongoing military conflict between Russia and Ukraine which is impacting the crude prices. Globally, the rate hikes by US Federal Reserve, tightening of monetary policy by the global central banks and appreciation of the foreign currency dollar rate has triggered the offshore investors to offload the equities from sensitive markets," said Manoj Purohit, Partner & Leader – Financial Services Tax, BDO India.

According to Srivastava, investors are also cautious due to the fear that high inflation could hamper corporate profits and also impact consumer spending. These factors, along with the continuation of war between Russia and Ukraine could further dislodge global economic growth.

On the domestic front too, the concerns over surging inflation as well as further rate hikes by the RBI, and its impact on the economic growth, loomed large, he added.

Foreign investors have been taking out money from equities in the last eight months (from October 2021 to May 2022), withdrawing a massive net amount of ₹2.07-lakh crore.

Signs of FPI selling exhaustion

However, there are signs of FPI selling exhaustion. In the early days of June, FPI selling is in very small amounts, VK Vijayakumar, Cheif Investment Strategist at Geojit Financial Services, said. The sell-off in the month of June could be attributed to rising risk of inflation and elevated crude oil prices, Kotak Securities' Chouhan said.

"If the dollar and the US bond stabilise, FPI selling is likely to stop and may even reverse. On the contrary, if US inflation remains elevated and dollar and bond yields continue to rise, FPIs may resume selling. US inflation data is the key," Vijayakumar said.

In addition to equities, FPIs withdrew a net amount of about ₹5,505 crore from the debt market during the period under review. They have been incessantly withdrawing money from the debt side since February. Apart from India, other emerging markets, including Taiwan, South Korea, Indonesia and the Philippines, witnessed outflow in the month of May.