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Foreign fund outflow from the banking and financial services sector crossed ₹50,000 crore in the first three quarters of the current fiscal amid rich valuations of the sectoral stocks and concerns over credit growth due to the new coronavirus variant.
Latest data from depositories show foreign portfolio investors (FPIs) have pulled out ₹50,892 crore from banking & financial services sector between April-December, 2021. Of the total outflow, 81 per cent or ₹41,249 crore was from equities while the remaining ₹9,743 crore was pulled out from the debt. Within equities, the banking sector witnessed the maximum brunt of FPI outflow with a net outflow of ₹34,406 crore while the other financial services sector lost ₹6,842 crore in the first nine months of the current fiscal. “The Indian financial sector, especially private sector bank stocks have been stellar performers in the past decade. FPIs, who traditionally have high exposure to the BFSI sector, have been selling the banking stocks as a measure of risk adjustment and to trim their exposure to the overweight banking sector in the medium term,” said Kranthi Bathini, director of equity strategy at WealthMills Securities.
‘Stretched valuations’
FPI flows have considerable influence on the performance of banking stocks given their highest allocation towards the financial services sector. Nearly one-third of FPIs assets under custody (AUC) are concentrated into banks and financial sector stocks.
In a recent analysis, Motilal Oswal Securities found that the Nifty Bank Index tends to underperform the benchmark Nifty during the months when there is heavy selling by the overseas investors.
As per the study, Nifty Bank index underperformed the Nifty index in seven out of 10 months, when FPIs outflow was highest.
Ajit Mishra, VP - Research, Religare Broking, said FPIs have been pulling out money from Indian equities due to stretched valuations and the outflow is broad based including the banking sector.
“The underperformance of the sector due to concerns about credit growth and asset quality may have also prompted them to withdraw,” Mishra said, adding, “The worries around the COVID-led disruptions are far from over and the recent rise in COVID cases has led to fresh restrictions which may further impact the businesses to a certain extent. All these factors would remain on their radar for their future positioning.”
Uncertainty, credit risk
On the debt side, FPIs pulled out ₹9,743 crore from the total financial services sector. Of the total outflow, ₹1,714 crore was from the banking sector while the NBFC sector saw an outflow of ₹8,029 crore.
“We believe uncertainty about economic recovery, higher inflation concerns, and tightening monetary policy are major factors.
“Besides, we feel the credit risk could also be the reason in some cases,” Religare’s Mishra said.
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