Selloff 2022: Foreign Portfolio Investors (FPI) or Fair Weather Friends (FWF)?

Sanjeev Sharma

New Delhi, June 18 (IANS) The sharpest rate hike of 75 basis points since 1994 by the US Federal Reserve is the latest flashpoint in the global and Indian stock markets reeling under massive selling pressure of foreign investors.

Indian and global markets too slumped on Thursday over recessionary fear after the US Fed raised interest rates by 75 bps, the biggest increase since 1994. Further, Fed Chair Jerome Powell signalled another big move (50-75 bps hike) next month, intensifying its fight to contain rampant inflation.

It has sharply increased the interest rate target to 3.4 per cent for 2022 and 3.8 per cent for 2023, according to Motilal Oswal Financial Services.

Sorbh Gupta, Fund Manager, Equity, Quantum AMC, said in a note that May has seen FPI outflows of $5.17 billion. This has been the thirst worst month of FPI flows since FPI investments were allowed to invest in India in 1991.

"Interestingly, of the five 'worst ever' months of FPI flows, 4 have come in this calendar year. Domestic institutional investors (mutual funds and insurance put together) have been net buyers for May 2022 to the tune of $6.57 billion," he added.

Equity investors who have invested in equity markets in the last two-three years have seen mostly positive returns and a swift recovery after every correction. The current volatility and slow grind of the markets will test their patience, Gupta said.

S&P BSE SENSEX declined by (-) 2.16 per cent on a total return basis in the month of May 2022.

It has underperformed developed market indices like S&P 500 (0.18 per cent) and Dow Jones Industrial Average Index (0.32 per cent). S&P BSE SENSEX has also underperformed MSCI Emerging Market Index (0.46 per cent). The broader market has been weaker, S&P BSE Midcap Index has declined by (-) 5.5 per cent for the month & S&P BSE Small cap Index declined by 7.8 per cent.

The power and metal sectors which have been hogging the limelight over the past few months were the biggest losers, falling by 11.3 per cent and 15.5 per cent, respectively. The BSE Auto Index was the only sectoral indices in the green moving up by 4.9 per cent.

Yes Bank said in a note that the higher current account deficit will not be fully covered by capital flows in FY23. India has already witnessed FII outflows of $30.5 billion since October 2021 and $9.4 billion since April 2022, from both debt and equity.

"Even as we expect FDI flows to stay on a strong footing (though weaker than the previous fiscal) and short-term trade finance to remain buoyant, overall flows under the capital account is expected at around $55 billion in FY23, compared to $94 billion in FY 22," the note said.

The risks of a lower BoP balance cannot be ruled out in the event of larger outflows than being currently anticipated.

As per the IIF, capital flows to EM, including India, are expected to slow to $972 billion this year from $1.68 trillion in 2021, a decline of 42 per cent YoY.

Excluding China, the net capital flows are likely to drop to $645 billion, down from $1 trillion last year. The underlying weak fundamentals of the EM economies on account of higher oil prices, high Current Account Deficit (CAD), elevated general government debt to GDP ratio and limited fiscal space to support growth is likely to limit the possibility of much capital pull into the region, Yes Bank said.

In FY 2021-22 alone, FIIs sold their investments for approximately worth Rs 1.22 lakh crore as against FY 2020-21 where they invested around Rs 2.67 lakh crore. There are multiple reasons because of which FIIs started pulling out their investments from the Indian markets since the last financial year, Angel One said in a note.

The Russia-Ukraine war took centre stage in the last week of February. Uncertainties and geopolitical complexities that arose due to this war have created a fear among foreign investors. This has resulted in the FIIs outflows in India.

India is the third largest consumer of crude oil and is also the third largest importer of crude oil across the globe. The heat of the Russia-Ukraine war had a massive impact on the global economy as the crude oil prices spiked. These soaring crude prices turned the Indian stock market volatile and resulted in the increase in the costs of transportation and an increase in inflation. This impact on the economy and imports influenced foreign investors' sentiments which pushed them to pull their money out of the Indian stock market, Angel One said in a note.

Indian markets are aligned with the US and the other global markets which means if the other markets start falling, Indian markets will also be impacted. Among the major reasons that are recently affecting the US economy are higher inflation, an expected rise in the interest rate to control inflation and rising inflation has led to a sharp jump in the US bond yields.