Foreign portfolio investors (FPIs) holdings in domestic equities reached USD 612 billion in the March quarter, down 6 percent from the previous quarter, according to the Morningstar report.
This was largely due to massive sell-off by foreign investors and a correction in the Indian equity market.
At the end of the March quarter, the value of FPI investments in Indian equities fell to USD 612 billion, down from USD 654 billion recorded in the previous quarter, down about 6 percent, the report said.
As of March 2021, the value of FPI investments in Indian equities was USD 552 billion.
As a result, FPI’s contribution to Indian equity market capitalization also declined to 17.8 per cent from 18.3 per cent in the quarter under review.
Offshore mutual funds form an important component of total foreign portfolio investment in addition to other large FPIs such as offshore insurance companies, hedge funds and sovereign asset funds.
In the March quarter, FPIs net sellers in Indian equities stood at US 14 14.59 billion, compared to a net inflow of US 5. 5.12 billion in the previous quarter.
On a month-on-month basis, foreign investors offloaded old net worth of USD 4.46 billion in January, USD 4.74 billion in February and USD 5.38 billion in March.
The quarter ended March saw the expulsion of foreign funds from the Indian equity market in an epic proportion. The caution shown among foreign investors was evident from the beginning of the quarter, which intensified as the market moved under the influence of alarming trends in both global and domestic markets.
Explaining the sell-off, the report noted that weakness in global markets has led to a risk-free approach to equities. Since the start of the quarter, sentiment has been hurt by the US Fed’s indication that it will soon begin raising interest rates and shrink its bond holdings. With that information, FPIs have chosen to move away from a rich valuation market to invest in a market that offers relatively attractive valuations and better risk / reward.
On the domestic front, pro-growth budgets and normalization in the third wave of epidemics in India have eased somewhat and have been able to test some outflows of funds in the interim. However, as tensions between Russia and Ukraine began to rise, the situation began to worsen, the report noted.
Rising crude prices and rising inflation in the United States continue to worry foreign investors as it paves the way for a rate hike by the US Fed. These concerns have confirmed that foreign investors continue to regularly offload their investments in the Indian equity market, it added.
However, after Russia declared war on Ukraine and in March, the US Fed raised the rate by a quarter percentage point for the first time since 2018 and at the same time it indicated a series of further rate hikes this year. This has opened the floodgates for the outflow of foreign money from the Indian equity market.
So far this calendar year, FPIs have sold over D 18 billion in net assets from the Indian equity market.
Going forward, foreign inflows into Indian equities may come under pressure as there is nothing to encourage and persuade foreign investors to invest in Indian equities. The ground reality is grim, the report noted.
“In addition to the rate hikes by both the RBI (Reserve Bank of India) and the US Fed, the uncertainty surrounding the Russia-Ukraine war, high domestic inflation, crude oil prices and weak quarterly results do not paint an incredibly positive picture. The recent rate hike could also slow the pace of economic growth, which is a matter of concern, “it said.
Adding to the concern is the resurgence of COVID-19 cases in China and other parts of the world. In such cases, FPIs are generally risk-averse and wait and see until greater clarity emerges, he added.