June sees worst FPI sell-off in more than two years

NARAYANAN V | | Updated on: Jun 30, 2022

| Photo Credit: Denis Vostrikov

Pull out more than ₹50,000 crore from Indian equities amid host of economic, geopolitical concerns

Foreign investors pulled out more than ₹50,000 crore from Indian equities in June, continuing their relentless sell-off in the Indian market for the ninth straight month. 

According to the latest data, foreign portfolio investors (FPIs) pulled out ₹50,203 crore from the equity segment in June. This is the worst monthly sell-off by FPIs after March 2020, in which foreign investors dumped shares worth ₹61,973 crore, spooked by the Covid outbreak and its impact on the economy.

Market experts attribute FPI exodus from Indian market to a host of economic and geopolitical reasons, including tightening monetary policy across global central banks, rising inflation, better yields in the US market, ongoing Russia-Ukraine war and its impact on oil prices, among other factors.

“FPI selling is rational when seen in the context of rising dollar and steadily appreciating bond yields in the US. FPIs will sell more in countries with high current account deficits (CAD). Consequently, currencies are vulnerable to depreciation. The rising oil import bill is likely to push India’s CAD to above 3 per cent of GDP in FY23. Therefore, the currency is expected to weaken more,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. 

FPIs have been on a selling spree in the Indian equities since October 2021. They pulled out ₹2.56-lakh crore in just nine months ending June 2022. 

However, Vijayakumar said the relentless FPI sell-off is not specific to India. “FPIs are selling in all emerging markets. The stock market returns in dollar terms in markets like South Korea, Taiwan, Philippines and Brazil are worse than returns from India.” 

Mayur Shah, PMS Fund Manager, Anand Rathi Advisors Ltd, said with the rise in the US interest rates, there will naturally be a shift of money flow from equity to the debt market. “Also the Price-to-Earnings (PE) multiple, which equity enjoys with lower interest rates goes for a contraction with inflation and interest rates moving up as the expected return from equity goes up. This leads to higher discounting of future earnings.”

Reversal of outflows

Vinit Bolinjkar, Head of Research, Ventura Securities, said a pause in the interest rate hike by the US Fed Reserve is essential for FPI outflows to reverse. “The US central bank hiked interest in June. It also indicated to hike interest rate by 75 bps in July. Besides, a pause in inflationary pressure will also bring FPIs back to the Indian market.” 

Geojit’s Vijayakumar said a reversal of the FPI outflow trend will happen if crude falls sharply. “This will allay fears of widening CAD and currency depreciation. Another possibility is the market correcting sharply by another 5 per cent making valuations attractive for FPIs.”

Published on June 30, 2022
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