Following the Reserve Bank and US Federal Reserve's tightening of monetary policy, high oil prices, and the erratic rupee, foreign investors have continued to flee the Indian equity markets and have taken about Rs 46,000 crore out of them so far this month.
According to depositories' data, the net outflow of foreign portfolio investors (FPIs) from stocks has reached Rs 2.13 lakh crore as of this writing in 2022.
Given the narrative of policy normalization put forth by the US Federal Reserve and other significant central banks, along with the high price of oil and unstable Rupee, FPIs are likely to avoid investments in emerging market assets. According to Yes Securities' Lead Analyst for Institutional Equities, Hitesh Jain.
FPI inflow won't start up again until the Fed stops raising interest rates and it is clear when US bond yields have peaked.
Furthermore, according to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, FPIs are likely to sell more if the current trend of rising dollar and bond yields continues.
The report shows that foreign investors sold off a net amount of shares worth Rs 45,841 crore in June (till 24th).
Since October 2021, FPIs have been steadily pulling money from Indian equities, and this significant selling by FPIs resumed in June.
According to Manoj Purohit, Partner & Leader - Financial Services Tax, BDO India, "the RBI's tightening of the monetary policy and inflated global commodity prices have primarily led the domestic markets to bleed in terms of substantial cash outflows from the equity markets during the last few months."
The last time such withdrawals occurred at this rate was during the first quarter of 2020, when the epidemic peaked.
According to Purohit, further fuel has been poured to the fire globally by the ongoing military crisis between Ukraine and Russia, rising federal funds rates, and the resurgence of the pandemic outbreak.
According to Vijayakumar of Geojit Financial Services, the main factors driving FPI outflows are the strengthening dollar and rising bond yields in the US.
Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, stated that another significant factor that has contributed to the outflows from domestic stock markets is its valuation, which continues to be at a premium, despite the recent correction, compared with other comparable markets.
According to him, this has also led to international investors taking profits here and moving their attention to other markets that offer more appealing valuations and risk-reward ratios.
It's interesting to note that domestic institutional investors (DIIs) are consuming the majority of FPIs' liquidity sales in high-performing sectors like IT and finance.
On the other side, throughout the review period, FPIs made a net investment in the debt market of around Rs 926 crore.
According to Srivastava, a major portion of the net inflow might be attributable to FPI's parking investments in light of lingering concerns.
In general, he continued, Indian debt doesn't seem to be an appealing investment option for overseas investors given the risk-reward ratio and the rising US interest rates.
Purohit of BDO India believes that, if not reversed, this short-term pace of negative volatility will certainly decrease in the upcoming weeks.
In comparison to other global markets, India is still in a superior position thanks in large part to the country's constant demand from consumers, strong financial performance by large corporations, and persistent growth patterns.
Other rising markets including Taiwan, South Korea, the Philippines, Indonesia, and Thailand have also seen a lot of FPI sales in addition to India.