Indian equities witnessed one of the worst monthly outflows of foreign funds in January. Foreign portfolio investors turned aggressive sellers of Indian shares following the US Federal Reserve’s confirmation to wrap up the taper process by March and possibility of interest rate hike to check the spiralling inflation.

According to depositories data, FPIs have pulled out ₹28,243 crore from equity cash segment as of January 28. The foreign investors have been net buyers since the beginning of the month, infusing ₹1,857 crore in the first fortnight. However, they turned net sellers in the second half and pulled out ₹30,100 crore in just nine trading sessions.

The highest ever monthly outflows from Indian equities, however, was in March 2020 when the foreign investors pulled out ₹61,973 crore spooked by the fast-spreading coronavirus and its impact on the economy due to lockdown and restrictions.

US Fed move

Market experts attribute the current FPI sell-off to the US Federal Reserve’s decision to end its massive asset purchase program by March 2022.

‘Markets remained under pressure for the second consecutive week and lost nearly 3 per cent, tracking feeble global cues. Participants were keenly awaiting the US FOMC meeting outcome and the news of tightening to start as early as March dented sentiment,” said Ajit Mishra, V-P Research, Religare Broking.

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Tapering refers to the gradual withdrawal of monetary stimulus by the US Fed Reserve. Since March 2020, the Fed has been purchasing massive quantities of government bonds and mortgage-backed securities to increase the money supply while keeping the interest rates at near zero levels to encourage lending. These are aimed at stimulating the growth in the economy, which was battered by the pandemic.

In November 2021, the Fed decided that its quantitative easing goals had been met. It began to taper down the monthly pace of Treasury and mortgage-backed security purchases. The Fed said it will end the tapering program by March 2022. The Federal Open Market Committee (FOMC) meeting held last week confirmed that it will end the asset purchase program in early March.

The FOMC also said, with inflation well above 2 per cent and a strong labour market, it expects an increase in the target range for the federal funds rate sooner.

USD-Rupee impact

An increase in the US interest rates could also lead to sell-off by global investors since rate hikes lead to a stronger dollar and a weaker rupee, thereby reducing returns on investments.

“From the FPI perspective, the market is expecting budget proposals to include India in the global debt indices. A post-Budget rally triggered by some positive proposals can turn the market around prompting FPIs to turn buyers,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

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