India FPI Outflows Could Intensify As Hopes For Fed Rate Cuts Diminish

With the US Federal Reserve delaying rate cuts until the end of the year, market participants expect foreign inflows in Indian and emerging markets to continue to take a hit. This will be triggered by the already rising yield in the US benchmark bond and geopolitical tensions.

FPIs will keep buying dollars, and inflows will take a beating with only one or a maximum of two rate cuts expected during the year-end, experts said. "I personally feel there will be one rate cut for the year by the US Fed in September by 25 bps, which is before the US presidential elections," said Kunal Sodhani, vice president at Shinhan Bank.

The US Federal Reserve has kept its key interest rate steady for the sixth straight time, citing expanding economic activity and easing but elevated inflation. The US 10-year yields surged to over a five-month high during April end to 4.72%, the highest since Nov. 2, 2023. Last month's yield surge was the highest in over seven months.

No longer will policymakers feel the need to start cutting rates in June, BoFA said in a note on May 6. "We now expect the Fed to start cutting rates in December."

Inflows have been impacted in April with outflows in the equity and debt markets, according to Anil Kumar Bhansali, head of treasury at Finrex Treasury Advisors LLP. The JPMorgan Bond Index and election results will be the positive factors to watch out for, according to Sodhani.

In April, India's bond market saw outflows in 12 months, despite its upcoming global bond inclusions. Developing-nation sovereign bonds slid by the most in seven months, while a gauge of currencies fell to the lowest since November, according to Bloomberg.

Foreign investors sold Indian stocks worth Rs 8,671 crore in April. Foreign outflows of Rs 10,949 crore were recorded during April, the first outflow since March 2023, according to the data from the NSDL. So far, FPIs have offloaded government securities worth Rs 1,727 crore in May.

Domestic investors are still bullish on the Indian economy and have invested Rs 36,660 crore in March.

In general, the surge in US 10-year yield is negative for India and other emerging markets if the trend continues, as it results in outflows of funds by FIIs, said Ajit Mishra, senior vice president of research at Religare Broking Ltd. However, there are multiple tailwinds to support the growth rate and that caps the negative flow of funds, he said.

As a result of dollar outflow, experts forecast the rupee to remain under pressure. Bhansali expects a range of Rs 83-84 on the rupee, with small bouts of depreciation as outflows due to FPI and oil companies keeping the dollar well bid. Indian and US elections, oil prices, and US data are important factors to be looked into in the in the next two to three months to keep a watch on Indian currency inflow, he said.

RBI has been intervening from both sides in order to curb excessive volatility, if any, Sodhani said. "For USD-INR, 83.15 acts as immediate support while 83.72 acts as resistance."