Foreign investors have pulled out nearly ₹7,500 crore from the Indian equity markets in the first two weeks of October on concerns of monetary policy tightening by the US Federal Reserve and other central banks globally, which could hamper global economic growth.

With this, the total outflow by foreign portfolio investors (FPIs) has reached to ₹1.76 lakh crore so far in 2022, data with the depositories showed.

Volatility to continue

Going forward, FPI flows are expected to remain volatile in the coming months due to ongoing geo-political risk, elevated inflation, expectation of rising treasury yields, etc, Shrikant Chouhan, Head-Equity Research (Retail) at Kotak Securities, said. "The markets were cautious ahead of the release of the US CPI print, which may determine the pace of future rate hikes in the US," he added.

According to the data, FPIs withdrew ₹7,458 crore from equities during October 3-14. This came following an outflow of over ₹7,600 crore in September on the hawkish stance of the US Fed and the sharp depreciation in the rupee.

Prior to this, FPIs made a net investment of ₹51,200 crore in August and nearly ₹5,000 crore in July. Before July, foreign investors were net sellers in Indian equities for nine months in a row.

The triggers

The latest pullout by FPIs was largely driven by the concerns of the monetary policy tightening by the US Fed as well as other central banks globally, which could hamper global economic growth, Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said. "The major trigger for FPI selling is the sustained rise in the dollar and expectations that the dollar will continue to remain strong in the current global macro construct," V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

The flows from FPIs have been inconsistent over the last few months as they kept on changing their stance frequently tracking the fast-changing investment scenario. The broader sentiment has been unconducive although there have been some intermittent breathers.

"Expectation of further and aggressive rate hikes by the US Fed, depreciating rupee, fears of a recession and continuation of conflict between Russia and Ukraine would continue to have a negative impact on foreign flows into Indian equities.This scenario has created an environment of uncertainty leading investors to turn risk averse," Srivastava said.

Vijayakumar noticed an important trend in FPI selling -- they sell financial and IT stocks, which form the largest chunk of FPI holding. This trend is evident now also. Also, FPIs have been selling in Oil & Gas and metals too since these segments too will be impacted by a global economic slowdown, he added.

In addition to equities, foreign investors have pulled out ₹2,079 crore from the debt market during the period under review. Apart from India, FPI flows were negative for the Philippines, Taiwan and Thailand this month so far.

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