Foreign portfolio investors (FPIs) dumped Indian shares worth a record Rs 1.4 lakh crore in the financial year 2021-22, after pumping in a whopping Rs 2.7 lakh crore in the preceding fiscal, mainly on account of a sharp surge in coronavirus cases, concerns over the risk to economic recovery and global turmoil triggered by Russia-Ukraine war.
This was the worst ever exodus by FPIs from the domestic equity market. They withdrew Rs 88 crore in 2018-19, Rs 14,171 crore in 2015-16 and Rs 47,706 crore in 2008-09, data with depositories showed.
Moreover, experts believe that flows from FPIs are expected to remain volatile in the near term, given the headwinds of elevated crude prices and inflation.
From April 2021 to March 2022, FPIs were net sellers in Indian equities to Rs 1.4 lakh crore. They have withdrawn nine of the 12 months in the just concluded financial year. They have been selling domestic equities since October 2021.
Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said multiple factors have led to the FPIs outflow in the preceding fiscal, which included the sharp surge in coronavirus cases during April-May 2021, the peak period of the second wave of the COVID-19 pandemic.
"The sudden and sharp surge in the coronavirus pandemic in the country and its ferocity took foreign investors by surprise, who until then were sailing comfortably on the expectation of quick economic recovery. Further, the daily number of COVID-19 cases crossed over the 4-lakh mark in May. The concerns over the risks to economic recovery became more pronounced with the lockdown imposed in several states to contain the spread of the virus. These factors spooked foreign investors," he added.
Overall, FPIs started the financial year 2021-22 on a negative note and offloaded equities worth Rs 12,613 crore during April-May 2021. The scenario, however, started to improve in mid-May as the daily caseload commenced a downward trend.
Overseas investors came back in June and made a net investment of Rs 17,215 crore on consistently falling coronavirus cases in the country. Most states started relaxing lockdowns, which augured well for the pick-up in business activities.
Apart from these factors, good quarterly results and a positive earnings growth outlook over the long term refuelled FPIs' interest in Indian equities. Besides, pick-up in the vaccination drive boosted investor sentiment and fanned the expectation that the second wave will have a limited impact on the country's economy.
However, from an upbeat mood in June, FPIs turned net sellers in July as they pulled out Rs 11,308 crore on US Fed's hawkish statement that it might raise interest rates much earlier than assumed. Further, rising valuations, a surge in oil prices and firmness in the US dollar made them wary of the near-term risks.
Once again, they returned to equities in August, and the positive momentum continued in September, improving the macro environment and positive outlook. This was also driven by the expectation that as the pace of vaccination picks up and a large part of the population receives vaccines; the economy would improve and soon be back on track.
However, the pace of FPI flows could not sustain as the trend reversed in October, and the net withdrawal continued till March 2022 due to uncertainties on the global and domestic fronts.
The spread of the highly transmissible Omicron variant of coronavirus in India and other parts of the world became a cause of concern. Besides, the anticipation of rate hikes by the US Federal Reserve and deteriorating geopolitical environment amid the Russia-Ukraine war impacted FPIs flow, Srivastava added.
According to Nikhil Kamath, co-founder of True Beacon and Zerodha, India looks expensive on a relative basis. FPIs could be rebalancing into China and other opportunities by reducing their India exposure.
Atanuu Agarrwal, the co-founder of UpsideAI, said the primary reason for the outflow remains the changing interest rate environment and the Fed's signal to end the stimulus.
"There are multiple other reasons -- India is expensive, crude has shot up, INR is weak, Russia-Ukraine conflict leads to a flight to safety. But all things being equal, if the Fed had signalled a delay in raising rates, we may not have seen a sale of this scale," he added.
On the other hand, foreign investors have made a net investment of Rs 1,628 crore in the debt markets in 2021-22. This comes after a net outflow of Rs 50,443 crore in the preceding financial year.
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