Foreign portfolio investors continue sell-off; withdraw Rs 41,000 cr in March on US Fed rate hike anticipation

Continuing their selling spree for the sixth consecutive month, foreign investors pulled out a massive Rs 41,000 crore from the Indian equity market in March on anticipation of rate hikes by the US Federal Reserve and deteriorating geopolitical environment amid the Russia-Ukraine war.

Further, flows from foreign portfolio investors (FPIs) are expected to remain volatile in the near term given the headwinds in terms of elevated crude prices and inflation, experts said.

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According to data available with the depositories, FPIs were net sellers to the tune of Rs 41,123 crore in the equity market last month.

This was way higher than net withdrawals of Rs 35,592 crore in February and Rs 33,303 crore in January.

Foreign investors have been withdrawing money from equities since the last six months, pulling out a net Rs 1.48 lakh crore between October 2021 and March 2022.

Commenting on the latest outflow, Atanuu Agarrwal, co-founder, UpsideAI, said "the primary reason remains the changing interest rate environment and the Fed's signal to end the stimulus."

"There are multiple other reasons -- India is expensive, crude has shot up, INR is weak, Russia-Ukraine conflict leads to flight to safety. But all things being equal, if the Fed had signalled a delay in raising rates, we may not have seen a sale of this scale," he added.

Making similar arguments, Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said the outflows can be attributed to the anticipation of rate hike by US Fed, and deteriorating geopolitical environment with Russia and Ukraine engaging in a war.

Nikhil Kamath, co-founder, True Beacon and Zerodha, said India looks expensive on a relative basis, and FPIs could be rebalancing into China and other opportunities by reducing their India exposure.

Cyclically, this is the first time we have noticed a prolonged inverse correlation between FPI flows and Nifty, he added.

Apart from equities, the debt market saw net outflows to the tune of Rs 5,632 crore in March.

Srikant Chouhan, Head - Equity Research (Retail), Kotak Securities, said global markets have noted progress in Russia-Ukraine negotiations and are hoping for gradual normalisation.
Equity markets were strong globally, while commodities witnessed some correction from elevated levels.

"However, given the headwinds in terms of elevated crude prices, inflation, etc FPI flows are expected to remain volatile in the near term," he added.

Apart from India, other emerging markets such as Taiwan, South Korea and the Philippines too witnessed FPI outflows in March.

Recently, the US Fed increased policy rate for the first time since 2018, by a quarter percentage point, thus finally ending its ultra-easy pandemic-era monetary policy and indicating more rate hikes this year.

The war between Russia and Ukraine too continues. Therefore, under the given fast-changing global landscape, foreign flows into Indian equities could shift either way depending on how the underlying scenario changes, Morningstar India's Srivastava said.