IIDs save record breaking $26 billion FPI outflow

Record outflows of Rs 201.5 billion ($26 billion) by foreign portfolio investors (FPIs) since October 2021, have made it the largest liquidations in Indian capital market history. A big crash in the markets was averted as domestic institutional investors (DIIs), led by mutual funds, injected Rs 240.250 crore ($31 billion) during this period.

Mutual funds have invested Rs 155 000 crore since October in the market and investors put more than Rs 10 000 crore through MF systematic investment plans (SIP) every month.

Outflows due to sustained FPI sales over the past seven and a half months have even surpassed the previous record for FPI sales when Rs 116,250 crore, or $15 billion, at current exchange rates, were withdrawn during the global financial crisis. crisis between January 2008 and March 2009.

According to data compiled by The Indian Express, when the covid pandemic hit the country in March 2020, FPIs withdrew more than 85.25 billion rupees ($11 billion) from India. However, markets pulled back and later recovered as the economy recovered from the impact of the Covid pandemic.

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“Relatively high valuations in India, rising US bond yields, an appreciating dollar and concerns about the possibility of a US recession triggered by aggressive tightening are factors behind the FPI withdrawal,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. .

When the global economy took a hit, central banks around the world slashed interest rates and announced liberal monetary policies. While this helped economies recover and led to increased consumption, excess liquidity in the financial system raised a major concern: inflation.

With inflation rising to new levels in major economies like the US and the Eurozone, central banks have started to tighten monetary policies and raise interest rates. In India, inflation rose to an eight-year high of 7.79 percent in April, prompting the RBI to raise the repo rate by 40 basis points to 4.40 percent. In fact, inflation has risen to multi-decade heights in several economies. If US CPI inflation was around 8.3 in April, UK CPI inflation rose to 7.0% in March, the highest in the data series. Overall, euro zone annual inflation reached a new peak of 7.5 percent in April driven mainly by energy and followed by food, alcohol and tobacco, according to a RBI report. Even among BRICS economies, inflation in China rose to a five-month high of 2.1 percent in April as supply pressure worsened due to widespread lockdowns.

This has resulted in a sharp sell-off in financial markets around the world since April. In fact, the Sensex is down 10.5 percent since April 4, when it closed at 60,611. If the concern then was the pace of easing by major central banks, in particular the US Federal Reserve, there was concern about the impact that inflation and interest rate hikes could have on global growth.

Recently, there have been signs of exhaustion of selling by FPI and DII and retail buying is emerging as a strong counter to FPI selling at higher levels, FPI may continue to sell. If the global markets are stable, the FPI sale will easily be absorbed by DII plus the retail purchase,” he said.

With FPIs on a selloff, FPI ownership in Indian shares has fallen around two percentage points over the past two years to 19.5 percent as of March 2022 according to data reported by NSE500 companies. The rupee has also fallen in the past year, weighed down by rising inflation, interest rates, the outflow of foreign investors and falling markets.

“FPI ownership levels fell below Covid lows by 19.5 percent due to sustained outflows,” Bank of America (BoFA) Securities said in a report.

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