The banking and financial services sector is bearing the brunt of FPI exodus from the Indian market. Foreign portfolio investors (FPIs), who have been on a record selling spree in the current fiscal, have pulled out over ₹79,000 crore from financial sector equities, making it the highest-ever outflow from the sector in capital market history. 

According to latest data from depositories, FPIs pulled out ₹79,028 crore from the financial services sector between April 1, 2021, and March 15, 2022. Of the total outflow from the financial services sector, FPIs pulled out ₹49,718 crore from the banking sector and ₹29,310 crore from other financial services sector. As much as ₹20,000 crore was pulled out in the last 10 trading sessions. 

Kranthi Bathini, equity strategist at WealthMills Securities, said the massive outflow from the banking and financial services sector was primarily due to the portfolio construct of FPI assets in India, and the high valuation of the stocks in the sector.

“Historically, FPIs have high exposure in the banking sector stocks, especially in the private banks such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank. FPIs have been exiting from the entire emerging markets, including India, and the banking sector, due to its portfolio weightage, is naturally facing huge outflow,” Bathini added. As of March 15, FPI assets in the financial sector equities stood at ₹13.02-lakh crore, or 29.25 per cent of their total assets, across 35 sectors. 

Selling spree

FPIs have been on a sustained selling spree from the Indian market due to a host of factors, including rising interest rates in the global markets, high valuation of Indian stocks, profit booking after a sharp market rally over the last two years, and recent geo-political events in Russia and Ukraine. While the foreign investors made a net investment of ₹8,531 crore in the first six months, they turned net sellers since October 2021, pulling out ₹1.49-lakh crore as of March 15. 

“FPIs have been a net seller in the last one year, largely because of concern regarding the Covid third wave, high inflation and slow pace of economic growth. Besides, stretched valuation of equity markets led to the selling pressure and banking, which holds the highest weightage in the index, was impacted the most,” said Ajit Mishra, V-P, Research, Religare Broking.

However, market experts also see the return of foreign investors with enhanced clarity on the roadmap of policy rate hikes by the US Fed and possible realignment of funds out of Russia. 

“Given India’s structural appeal among emerging markets and that some part of Russian allocations in foreign portfolios could find their way to India, FPIs may be poised to make a comeback sooner than later. This, coupled with the already buoyant domestic participation, can put bulls back in charge of markets,” said Vinit Bolinjkar, Head of Research, Ventura Securities.

Religare Broking’s Mishra agrees. “India has been a preferred investment destination for FPI so they would once again invest money in equity markets once economic growth starts picking up pace and inflation woes recedes.”