Continuing their massive selling spree for the ninth consecutive month, foreign investors dumped Indian shares worth ₹50,203 crore in June — the highest net outflow in over two years — amid aggressive rate hike by the US Federal Reserve, elevated inflation and relatively higher valuation of domestic equities.

Foreign portfolio investors (FPIs) have now pulled out around ₹2.2 lakh crore from domestic equities in the first six months of 2022, the highest-ever net withdrawal by them. Before that, FPIs withdrew ₹52,987 crore in the entire 2008, data with depositories showed.

The massive capital outflow has also contributed to the depreciation in the rupee, which breached the 79-mark against the US dollar for the first time last week.

FPI flows to remain volatile: Experts

Analysts warn that FPI flows are likely to remain volatile in the near term. "Going ahead, we believe inflation would be the key driver to monitor to decide the trend, coupled with narrowing yield gap between bond and equities," said Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities.

According to the data, FPIs withdrew a net sum of ₹50,203 crore from equities in June. This was the highest net outflow since March 2020, when they had pulled out ₹61,973 crore.

FPIs have been deserting Indian equities since October 2021. "Aggressive rate hike by US Fed, high inflation as well as relatively higher valuation of Indian stocks continued to keep foreign investors at bay through the month of June," said Himanshu Srivastava, Associate Director - Manager Research, Morningstar India. According to him, the broader sentiment remained negative towards India, which prompted foreign investors to carry forward their cautious stance on domestic equities. Compared to other emerging markets, India is among the worst hit with respect to net outflows.

"The relentless FPI selling has to seen in the context of steadily rising dollar and bond yields in US. FPIs are selling more in countries with rising current account deficits (CAD) like India because the currencies of such countries are vulnerable to further depreciation," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Towards the end of June, FPI selling witnessed a declining trend. If the market rises in July, anticipating or responding to good first quarterly results, FPIs may sell again. This trend will be halted only when the dollar stabilises and US bond yields decline, he added.

"Broadly, from the risk reward perspective and with interest rates rising in the US, Indian debt doesn't appear to be an attractive investment option for foreign investors," Morningstar's Srivastava said.

“In addition to India, FPI flows in June was negative in other emerging markets like Indonesia, Philippines, South Korea, Taiwan and Thailand,” he added.

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