Moreover, experts believe that flows from FPIs are expected to remain volatile in the near term given the headwinds in terms of elevated crude prices and inflation.
From April 2021 to March 2022, FPIs were net sellers in Indian equities to the tune of Rs 1.4 lakh crore. They have withdrawn nine of the 12 months in the just concluded financial year. They have been selling domestic equities since October 2021.
Himanshu Srivastava, Associate Director – Manager Research, Morningstar India, said that multiple factors have led to the FPIs outflow in the preceding fiscal, which included the sharp surge in coronavirus cases during April-May 2021, the peak period of the second wave of the COVID-19 pandemic.
“The sudden and sharp surge in the coronavirus pandemic in the country and its ferocity took foreign investors by surprise, who until then were sailing comfortably on expectation of quick economic recovery. Further, the daily number of COVID-19 cases crossed over 4-lakh mark in May, and the concerns over the risks to economic recovery became more pronounced with the lockdown imposed in several states to contain the spread of the virus.These factors spooked foreign investors,” he added.
Overall, FPIs started the financial year 2021-22 on a negative note and offloaded equities worth Rs 12,613 crore during April-May 2021. The scenario, however, started to improve in mid-May as the daily caseload commenced a downward trend.
Overseas investors came back in June and made a net investment of Rs 17,215 crore on the back of consistently falling coronavirus cases in the country. Most of the states started relaxing lockdowns, which augured well for the pick-up in business activities.
Apart from these factors, good quarterly results and a positive earnings growth outlook over the long-term refuelled FPIs’ interest in Indian equities. Besides, pick-up in the vaccination drive boosted investor sentiment and fanned expectation that the second wave will have a limited impact on the country’s economy.
However, from an upbeat mood in June, FPIs turned net sellers in July as they pulled out Rs 11,308 crore in the month on US Fed’s hawkish statement that it might raise interest rates much earlier than assumed. Further, rising valuations, surge in oil prices and firmness in US dollar made them wary of the near-term risks.
Once again they returned to equities in August, and the positive momentum continued in September too on improving macro environment and positive outlook. This was also driven by expectation that as the pace of vaccination picks up and a large part of the population receives vaccines, the economy would improve and will soon be back on track.
However, the pace of FPI flows could not sustain as the trend reversed in October and the net withdrawal continued till March 2022 due to uncertainties on the global as well as domestic fronts.
The spread of the highly transmissible Omicron variant of coronavirus in India as well as other parts of the world became a cause of concern. Besides, anticipation of rate hikes by the US Federal Reserve and deteriorating geopolitical environment amid the Russia-Ukraine war impacted FPIs flow, Srivastava added.
According to Nikhil Kamath, co-founder, True Beacon and Zerodha, India looks expensive on a relative basis, and FPIs could be rebalancing into China and other opportunities by reducing their India exposure.
Atanuu Agarrwal, co-founder, UpsideAI, said the primary reason for the outflow 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.
On the other hand, foreign investors have made a net investment of Rs 1,628 crore in the debt markets in 2021-22. This comes after a net outflow of Rs 50,443 crore in the preceding financial year.