Sales by foreign portfolio investors (FPIs) in the Indian market seem to be slowing for seven months. After withdrawing over Rs 2.55 lakh crore since December 2021, FPIs have been net buyers in India so far in July, bringing some relief to bear-battered stock markets.
FPIs have invested Rs 870 crore in the domestic market so far this month after withdrawing Rs 51,422 crore in June and Rs 36,518 crore in May this year.
According to NSDL data, in July, FPI net investment in equity was Rs 1,099 crore and in debt Rs 792 crore, but they took Rs 926 crore from debt-VRR (voluntary retention route).
Analysts say there is a clear shift in FPI action in the market. “The relentless sell-off by FPIs starting October 2021 seems to have come to an end. They significantly reduced selling in July and even turned buyers for 5 days in July, especially in the last few days when they bought continuously,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. The dollar index, which had moved above 109, fell to 106.55 on Friday. This is one of the factors contributing to the change in FPI strategy, he added.
The FPI sell-off is being blamed on the tightening of monetary policy by the US Federal Reserve, which is on the cusp of rate hikes to control inflation. Other central banks, including the UK and the Eurozone, are following suit. “Relatively high valuations in India, rising bond yields in the US, an appreciating dollar and concerns over the possibility of a recession in the US as a result of aggressive tightening are the reasons behind the FPI withdrawal,” said an analyst.
When the global economy takes a hit, central banks around the world cut interest rates and announce accommodative monetary policy. While this helped economies recover and led to higher consumption, the excess liquidity in the financial system led to a bigger concern: inflation.
With inflation rising to new highs in major economies like the US and the Eurozone, central banks have begun tightening monetary policies and raising interest rates. In India, inflation hit an eight-year high of 7.79 percent in April, prompting the Reserve Bank of India (RBI) to raise the repo rate by 90 basis points to 4.90 percent. Retail inflation was 7.01 percent in June, well above RBI’s upper tolerance limit of 6 percent. In fact, inflation in many economies has risen to multi-decade highs.
FPIs (in value terms) held Rs 51.99 lakh crore in NSE-listed companies as on March 31, 2022, down 3.36 per cent from Rs 53.80 lakh crore as on December 31, 2021, due to sustained sell-off from October 2021. FPIs hold significant stakes in large caps such as private banks, tech companies and Reliance Industries The US accounts for the largest share of FPI investments at Rs 17.57 lakh crore till May 2022, followed by Mauritius (Rs 5.24 lakh crore), Singapore (Rs 4.25 lakh crore) and Luxembourg (Rs 3.58 lakh crore), according to data available from NSDL. .
The recent Sebi decision to allow FPIs in the commodity derivatives market is expected to increase inflows. “As India grows and aspires to become a $5-trillion economy, opening the door to foreign investors and allowing FPIs to participate in exchange-traded commodity derivatives will not only help integrate Indian commodity markets with global markets but also Will also benefit. managing the price gap and increasing liquidity in the market,” said Manoj Purohit, Partner and Leader—Financial Services Tax at BDO India.
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He said SEBI has struck the right chord at a time when FPIs have been steadily raising cash triggered by a number of global, economic, political and market-driven factors. “This announcement will act as a positive breath in the face of global volatility in capital markets.”
With the rupee under pressure, India’s foreign exchange reserves fell by another $7.54 billion to $572.71 billion in the week ended July 15 amid rising dollar appreciation and capital outflows from India due to rising US inflation and rate hikes.