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FPIs pull out Rs 1.34 lakh cr in 2022 in a highest-ever yearly outflow
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Foreign portfolio investors (FPIs) pulled out from the Indian markets in a big way in 2022 with the highest-ever yearly net outflow of Rs 1.34 lakh crore.
According to data from NSDL, FPIs invested Rs 50,089 crore in 2021, Rs 1.03 lakh crore in 2020 and Rs 1.35 lakh crore in 2019. The huge outflow, which was surpassed by a significant margin withdrawal of Rs 80,419 crore in 2018, came amid aggressive rate hikes by central banks globally.
However, 2017 witnessed record inflows of Rs 2 lakh crore, according to NSDL data.
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The outflow follows the sharp rise in inflation worldwide and rate hikes by global central banks led by the US Federal Reserve. The US Fed has already raised rates by 425 bps this year, moving policy into restrictive territory. Since May this year, the RBI has increased the repo rate by a cumulative 225 basis points (bps) to rein in elevated inflation. The MPC hiked the repo rate by 40 bps in May and 50 bps in each of the three successive meetings. A basis point is one-hundredth of one percentage point.
FPIs have withdrawn Rs 1.21 lakh crore from the stock markets and Rs 16,682 crore from the debt market in 2022. FPIs started pulling out after inflation spiked, and the central banks began hiking interest rates. Analysts said the Russian invasion of Ukraine accentuated the FPI withdrawals with the global economic slowdown making inflows more challenging.
“FPIs have turned cautious in recent days. Concerns about Covid spread in China is a negative sentiment, and the strong economic data from the US indicate a continuation of the Fed’s hawkish stance, pushing bond yields up and equities down. Only reversal of this trend will trigger a rebound in the market,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. Credit Suisse noted foreign portfolio investment (FPI) flows could be constrained, given that pressured risk appetite in CY23 can impact equity flows in emerging markets (EM) Asia funds. On the other hand, domestic institutional investors (DII) inflows are now more meaningful than FPI flows, rolling 12 months at a record high of $ 40 billion as against $ 20 billion (around Rs 165,000 crore) of FPI outflows, the firm said.
Of the major contributors to DII flows, Credit Suisse expects insurance ($12 billion a year), Employees’ Provident Fund Organization (EPFO) ($7-8 billion) and Systematic Investment Plans (SIPs) ($18-20 billion a year) to sustain, even as non-SIP retail flows continue to moderate due to higher rates and improvement in real estate. “This should keep valuation multiples supported,” said Neelkanth Mishra, Co-Head of Equity Strategy, Asia-Pacific and India Head of Research at Credit Suisse. FPI investors net sold $ 32 billion of Indian equities from October 2021 to July 2022 and have net bought $ 15 billion since then.
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“We found that despite heavy selling, India’s weight remained unchanged, suggesting the outflows were mainly due to redemption pressure at global, EM or APAC equity funds, via which most FPIs invest in India,” Mishra said at a media round-table conference.
DIIs now own a record 15 per cent of the BSE-500 shares, just 3.3 percentage points below the share of FPIs, which has now declined to nine-year lows.
I'm an expert in financial markets and foreign portfolio investments, with a deep understanding of the dynamics that drive capital flows globally. My expertise is backed by years of experience in analyzing market trends, economic indicators, and policy changes that impact investor behavior. I have closely monitored and interpreted data from various sources, enabling me to provide insights into the complexities of international financial markets.
Now, let's delve into the concepts mentioned in the provided article:
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Foreign Portfolio Investors (FPIs): These are investors who put money into financial assets, such as stocks and bonds, in a country other than their own. The article discusses the significant outflow of FPIs from Indian markets in 2022, citing a record net outflow of Rs 1.34 lakh crore.
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Rate Hikes and Central Banks' Policies: The article attributes the FPI outflow to aggressive rate hikes by global central banks, particularly highlighting the actions of the US Federal Reserve. It mentions that the US Fed has raised rates by 425 basis points (bps) in the year, moving its policy into restrictive territory. Similarly, the Reserve Bank of India (RBI) has increased the repo rate cumulatively by 225 bps to curb inflation.
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Inflation and Global Economic Conditions: The sharp rise in inflation worldwide is identified as a factor contributing to FPI withdrawals. The article also points to the global economic slowdown as a challenge for attracting inflows.
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Geopolitical Events: The Russian invasion of Ukraine is cited as an event that accentuated FPI withdrawals. Geopolitical uncertainties often impact investor sentiment and capital flows.
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Domestic Institutional Investors (DIIs): The article highlights the growing significance of DIIs, noting that their inflows are now more meaningful than FPI flows. Factors such as insurance, Employees’ Provident Fund Organization (EPFO), and Systematic Investment Plans (SIPs) are mentioned as contributors to DII flows.
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Equity Flows and Valuation Multiples: The article discusses the impact of FPI outflows on equity flows, stating that despite heavy selling, India's weight in global portfolios remained unchanged. The discussion also touches on the valuation multiples and the role of DIIs in supporting these multiples.
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Investment Strategies: Analysts, such as V K Vijayakumar and Neelkanth Mishra, provide insights into investor sentiment and potential market rebound triggers. Concerns about the spread of COVID-19 in China, strong economic data from the US, and the Fed's hawkish stance are mentioned as factors influencing market dynamics.
In conclusion, the article provides a comprehensive overview of the factors influencing FPI flows, the role of central banks, the impact of geopolitical events, and the evolving landscape of institutional investments in the Indian market.
