Outflow trend continues: Foreign Portfolio Investors withdraw Rs 6,400 cr from equity markets in May so far

The outflow trend of foreign portfolio investors (FPIs) continued in May as they, in the first four trading sessions of the month, have withdrawn over Rs 6,400 crore from the Indian market. This comes mainly on the back of the Reserve Bank of India (RBI) and US Federal hiked interest rates.

For seven months to April 2022, FPIs have remained net sellers, withdrawing a massive amount of over Rs 1.65 lakh crore from equities, a news agency PTI said in report.

The outflow was largely amid anticipation of a rate hike by the US Federal Reserve and due to the deteriorating geopolitical environment following Russia's invasion of Ukraine, the report added.

Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities, said, FPIs' flows in India are expected to remain volatile in the near term given the headwinds in terms of elevated crude prices, inflation, and tight monetary policy among others.

In the first week of April, FPIs turned into net investors after six months of selling spree amid correction in the markets and invested Rs 7,707 crore in equities.

After a short breather, once again they turned net sellers during the holiday-shortened April 11-13 week, and the sell-off continued in the succeeding weeks too.

FPI flows continue to remain negative in the month of May till date and they have sold around Rs 6,417 crore during May 2-6, data with depositories showed. The trading in market was closed on May 3 on account of Eid.

"With central banks across the world pressing the panic button and increasing interest rates, equity markets have also reciprocated the sentiment. Foreign investors continue to sell relentlessly," Vijay Singhania, Chairman, TradeSmart, said.

Making similar statement, Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said the week turned out to be an eventful one. RBI in an off-cycle monetary policy review on May 4 hiked the policy repo rate by 40 bps with immediate effect and cash reserve ratio by 50 bps effective May 21.

This attracted a sharp reaction from the markets which have been on a downward spiral ever since, he added.

On the other hand, the US Fed too raised rates by 50 bps on the same day, the biggest hike in two decades. Among investors, it fanned fears that going ahead, further large rate hikes are likely to come, he added.

Further, the Bank of England lifted its key rate to the highest level since 2009. Also, the market expects that Britain could see inflation at 10 per cent.

Additionally, concerns over COVID-19 in China could upset global supply chains and hit growth. This makes foreign investors move back to its home country, Chouhan said.

Apart from equities, FPIs withdrew a net amount of Rs 1,085 crore from the debt market during the period under review.

Going forward too, market volatility is expected to remain high as foreign investors may continue to withdraw funds. Unless the war is called off, selling is expected to continue, TradeSmart's Singhania said.

According to Morningstar's Srivastava, there is nothing much at the moment, which could cheer up foreign investors and coax them to invest in Indian equity markets.

"Besides the rate hikes by both RBI and US Fed, uncertainty surrounding Russia-Ukraine war, high domestic inflation numbers, volatile crude prices and weak quarterly results does not paint an incredibly positive picture. The recent rate hikes could also slow the pace of economic growth, which is also a concern," he said.

Adding to the worry is the resurgence of coronavirus cases in China and in some other parts of the world. In such a scenario, FPIs typically turn risk-averse and adopt a wait and watch approach until greater clarity emerges, he added.

Under the given circumstances and fast-changing global landscape, foreign flows into Indian equities could continue to be under pressure, until there is a change in the underlying drivers and investment scenario, he added.

Apart from India, other emerging markets, including Taiwan, South Korea and the Philippines witnessed outflows in the month of April to date.

(With PTI Inputs)