FPIs turn net sellers; withdraw Rs 4,200 cr in equities in Sep so far
Foreign portfolio investors (FPIs) have shifted from being consistent buyers to becoming net sellers, withdrawing a substantial amount of Rs 4,200 crore from Indian equities in September. This shift in investment behavior is primarily attributed to several key factors impacting global financial markets.
1. Rising US Bond Yields: The increase in yields on US government bonds has been a significant driver in the change of FPI sentiment. Higher bond yields in the US can attract foreign investors looking for better returns and can lead to capital outflows from emerging markets like India.
2. Stronger US Dollar: A stronger US dollar can make investments in emerging markets less attractive for FPIs as it can erode returns when converted back into their home currencies. This currency risk can influence FPI decisions to invest or withdraw from Indian equities.
3. Concerns Over Global Economic Growth: Uncertainty and concerns over the pace and sustainability of global economic recovery can prompt FPIs to be more cautious with their investments. Any negative signals about global economic growth can lead to a risk-off sentiment among investors.
Nitasha Shankar, the Chief Investment Advisor at YES Securities, rightly points out that the outflow of foreign portfolio money may persist in the coming weeks. This is due to the lingering uncertainty in global financial markets, which often results in investors reassessing their positions.
The sharp volatility in the Indian rupee is an additional factor to monitor. Exchange rate fluctuations can affect the returns of foreign investors and may influence their investment decisions. A depreciating rupee can make Indian assets less attractive for foreign investors.
The data provided shows that FPIs withdrew a net sum of Rs 4,203 crore from Indian equities in September, which followed a relatively lower investment of Rs 12,262 crore in August. These figures highlight the sensitivity of FPI investments to global economic and financial market conditions, and how they can swiftly change their positions based on these factors.
The recent outflow of foreign portfolio investment (FPI) in Indian equities is indeed a significant reversal of the trend observed in the preceding six months. From March to August, FPIs had been consistently buying Indian equities, infusing a substantial Rs 1.74 lakh crore into the market during this period.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, and Nitasha Shankar, Chief Investment Advisor at YES Securities, have rightly pointed out the key factors contributing to this reversal in September:
1. Rising US Bond Yields: The increase in yields on US 10-year Treasury bonds has been a central factor impacting FPI decisions. When US bond yields rise, it often leads to capital outflows from emerging markets like India as foreign investors seek better returns in the US.
2. Stronger US Dollar: The upward momentum of the US Dollar Index has made investments in emerging markets less attractive for FPIs. A stronger US dollar can erode the returns on foreign investments when converted back into their home currencies.
These factors have combined to create a risk-off sentiment among investors, causing them to reassess their investment strategies. The 15-year high in US 10-year Treasury bond yields underscores the attractiveness of US assets, which can divert capital away from other markets.
The volatility and uncertainty associated with these global factors can have a significant impact on FPI flows into India and other emerging markets. It’s essential for policymakers and market participants to closely monitor these developments and adapt their strategies accordingly.
Himanshu Srivastava, the Associate Director – Manager Research at Morningstar India, offers a comprehensive analysis of the recent net outflow of foreign portfolio investments (FPIs) from Indian equities. He underscores that the primary driver of this outflow is the prevailing uncertainties in the global interest rate landscape, with a particular focus on the United States, coupled with concerns about the overall trajectory of global economic growth. These concerns are deeply rooted in broader macroeconomic factors that are shaping the global financial landscape.
Global interest rate uncertainties, especially regarding the actions of the Federal Reserve in the United States, hold immense sway over the behavior of FPIs. Investors worldwide closely monitor central bank policies, and any hints or indications of potential changes in interest rates can trigger substantial market reactions. In light of these uncertainties, apprehensions about the timing and pace of interest rate hikes in the US have grown. This has prompted investors to explore alternatives and consider reallocating their investments to potentially higher-yield assets in anticipation of a rising-rate environment.
Furthermore, concerns about the path of global economic growth weigh heavily on investor sentiment. Economic growth is a pivotal determinant of corporate earnings and overall market prospects. Any doubts or ambiguities surrounding global economic growth can foster a risk-averse mindset among investors. Consequently, they become more cautious and inclined to reassess their investment strategies, leading to shifts in capital flows.
The surge in crude oil prices, combined with the reemergence of inflation risks on a global scale, adds another layer of complexity to the situation. Rising oil prices have the potential to impact various sectors of the economy and influence inflation levels. Inflation, in turn, has a direct bearing on central bank policies and interest rate decisions. This multi-faceted dynamic contributes to the overall uncertainty and unease prevailing in the financial markets.
Finally, the anticipation of a potential interest rate hike in the United States is a key factor. Such an action by the Federal Reserve could reverberate through global financial markets, affecting not only investment decisions but also exchange rates and capital flows across borders. This heightened sense of uncertainty has led many investors to adopt a “wait-and-watch” approach, as they closely monitor developments in the global economic landscape and central bank policies before making significant investment decisions.
Foreign portfolio investors (FPIs) have not only been active in the Indian equities market but have also shown interest in the country’s debt market, indicating a diverse investment portfolio. During the reviewed period, FPIs invested Rs 643 crore in India’s debt market, highlighting their confidence in Indian assets beyond equities.
As of now, FPIs have allocated a substantial Rs 1.31 lakh crore in Indian equities and approximately Rs 28,825 crore in the debt market for the current year. This demonstrates a significant capital infusion by foreign investors into India’s financial markets, contributing to liquidity and market development.
In terms of sectors, FPIs have consistently shown interest in capital goods and power, indicating their faith in the growth potential of these sectors. However, the selling pressure observed in financials has had a dampening effect on the prices of banking blue-chip stocks. This sector-specific investment pattern reflects the discerning approach of FPIs, where they focus on industries with growth prospects while being cautious about sectors with inherent risks or uncertainties.
VK Vijayakumar of Geojit Financial Services rightly points out that FPI behavior in Indian markets can be influenced by the trends in the US dollar index and US bond yields. When the dollar index and bond yields decline, it often makes emerging markets like India more attractive for foreign investors. Therefore, FPIs may shift their stance and become net buyers if these key global indicators move favorably. This potential change in investment behavior is contingent on incoming data related to US inflation and economic growth, as these factors play a pivotal role in shaping the global investment landscape.
In summary, FPIs’ diversified investment strategies, including both equities and debt, are contributing positively to India’s financial markets. Their willingness to invest in various sectors underscores their confidence in India’s economic prospects. The future direction of FPI investments in India will likely depend on the interplay of global factors, particularly the trends in the US dollar index and bond yields, and the assessment of US economic data.