Stimulus package: Super-rich surcharge leaves financial sector poorer as FPIs pull out ₹6,700 cr

After investing around ₹10,700 crore in the first three months of the current financial year, foreign investors pulled out nearly ₹6,700 crore from the financial sector in July.

According to data available with depositories, foreign portfolio investors (FPIs) pulled out ₹6,468 crore from bank equities in July and ₹229 crore from other financial services which includes financial institutions, housing finance companies and non-banking financial companies (NBFCs).

“Tax on super rich/FPIs in the Union Budget, poor to mixed corporate earnings, coupled with government’s hard steps on some sectors and below-average monsoon dented investors’ confidence in July,” said Deepak Jasani, Head — Retail Research, HDFC Securities.

“Hence, the sell-off in July in the financial sector reflects some profit-taking, in addition to the impact of the above factors,” he added.

The government’s higher tax surcharge announcement in the Union Budget has rattled the FPIs who have been on a selling spree since the beginning of July. After making a net investment of ₹31,709 crore in equities during April-June period, FPIs pulled out around ₹22,200 crore in July and August till date. However, FPIs continue to be net investors in Indian debt market with a total investment of ₹15,500 crore in July and August.

Software and services sector is the second-highest loser of FPI investment with a net outflow of ₹5,935 crore in July. The sell-off in the sector continues for the fourth straight month since the beginning of the financial year with a total outflow of ₹11,342 crore.

“After BFSI, the second-highest sectoral exposure of FPIs to Indian markets is through IT stocks and if they want to reduce exposure or get out, these are the assets they will sell,” said Joseph Thomas, Head of Research, Emkay Wealth Management.

Nullifying its first quarter investment of around ₹1,700 crore in the automobile & auto components sector, FPIs made a net sale of equities worth ₹1,700 in the sector in July. It was followed by oil & gas sector which lost ₹1,161 crore of foreign investment during the month. In the first quarter of FY19, oil & gas sector saw net inflow of about ₹4,950 crore.

“The demand slowdown (in automobile sector) is not expected to reverse in the immediate term, and investors, both domestic and foreign alike, may look at greener pastures until there are clear signs of growth revival,” said Thomas.

In the sovereign bonds, FPIs made a net investment of ₹13,438 crore during the May-June period. In July, they further pumped in ₹6,031 crore.

“Government bonds offer higher liquidity, easy entry and exit and enough sensitivity to rate falls. In addition, G-Sec yields fell 52 bps during July 2019, to end the month at 6.37 per cent,” Jasani said, adding that FPIs continued buying sovereign bonds on hopes of further fall in yields that may lead to gains in their holdings.