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After pulling out of a record number of investments in FY22, foreign investor sell-off in the banking and financial sector continues unabated in the current fiscal as well. As per the latest data, foreign portfolio investors (FPIs) have pulled out ₹3,370 crore from the financial services sector during the first fortnight.
Of the total outflow, ₹2,907 crore was from the banking sector while the remaining was from “other financial services”.
In FY22, FPIs made a historic exit from Indian equities amid a hawkish stance by the US Fed (which cut down on fiscal stimulus and raised interest rates to tame inflation), slowing economic growth, high valuation of Indian stocks and the Ukraine crisis; they pulled out over ₹1.4-lakh crore from Indian equities. The banking and financial services sector, which accounts for the highest share of FPI assets, bore the brunt of the exodus and saw an outflow of over ₹82,000 crore.
Bearish turn
Although FPIs began the current fiscal on a positive note, infusing over ₹13,600 crore in the first three trading sessions, they turned bearish on Indian equities in subsequent sessions. Muted Q4 earnings, especially by IT bellwether Infosys and HDFC Bank, hawkish statements from the US Fed Reserve, and spiraling commodity prices due to the Ukraine crisis dented FPI sentiment.
“FPI ownership levels fell below Covid lows at 19.5 per cent on the back of sustained outflows,” Bank of America (BofA) Securities said in a report. It added that March 2022 marked the 6th consecutive month of FPI outflows ($5.4 billion; the most severe since March 2020).
HDFC concerns
Market experts say the latest outflow from the banking and financial services sector was on account of weak earnings by HDFC Bank and investor apprehension over the growth prospects of HDFC Bank and HDFC Ltd, which announced a merger earlier this month.
“There are some concerns regarding the marginal hit to profitability of the merged entity due to higher SLR (statutory liquidity ratio) and CRR (cash reserve ratio) requirements (HDFC Ltd doesn’t have statutory requirements like SLR and CRR).
But the weakness in HDFC twins after the merger announcements is due to sustained selling by FPIs and shorting by speculators exploiting the FPI positioning in the stocks,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
The long speculated merger of HDFC Bank–HDFC was announced on April 4. Stock prices of both the companies have fallen by 18 per cent from their closing price on April 4.
Potential reversal expected
However, in its report, BofA Securities said it expects a potential reversal in FPI outflows from the equity markets, and believes that the FIIs ownership levels may pick up momentum in the coming months.
Kranthi Bathini, equity strategist at WealthMills Securities, said most current FPI outflows are ‘hot money’ — essentially, foreign exchange-traded funds (ETFs). He added that long-only FPI funds, India-focussed funds and sovereign wealth funds continue to stay invested, betting on the long-term growth prospects of the country.
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