The first six months of this year have witnessed heavy outflow of overseas investment from the Indian equity market. Foreign institutional investors (FIIs) have been net sellers in the Indian stock market each month of the year.
According to the data from depositories, the net outflow by foreign portfolio investors (FPIs) from equities crossed Rs 2.15 lakh crore on a year to date basis, which may increase further by the end of the month.
According to market experts, monetary policy tightening by the Reserve Bank and US Federal Reserve, high oil prices and volatile rupee are the key reasons for the secular FPI exodus.
Roop Bhootra – CEO, Investment Services, Anand Rathi Shares and Stock Brokers said that FII selling has been one of the major drags in domestic markets and is continuing for several months now.
“One positive factor is that our domestic inflows in the markets have been able to absorb this significantly and have helped in containing further risks,” Bhootra added.
Vinit Bolinjkar, Head of Research, Ventura Securities sees more selling as liquidity tightens further. He expects rate hikes to continue till early next year, denting the appeal for the domestic equity markets.
FPIs have been selling in nations which are mainly commodity consumers like India and buying commodity producers like Indonesia, Brazil and Malaysia, said Yesha Shah, Head of Equity Research, Samco Securities.
Shiv Chanani, Head of Research, Elara Securities said that the Chinese market has been attracting significant flows as valuations became very attractive after steep corrections.
“We believe that Indian markets are once again coming to an attractive zone,” he added. “Even so, investors would like to ride out the entire interest rate hike cycle before investing in Indian markets in an aggressive manner.”
Market participants believe that weaker rupee and firm dollar would add more exodus pressure. Fears of recession and rising inflationary worries would keep FIIs on their toes, moving out from the Indian equity markets.
With commodity prices correcting and demand slowing, it is quite likely that hike in interest rates going forward may not be as steep as anticipated. This pain may not last beyond this calendar year, expects Religare Broking.
However, a few analysts believe that the intense FII selling may take a halt if the monetary policy tightening moves towards the normalisation. A lot would depend on the interest rate trajectory abroad.
Brokerage firm Yes Securities said that the outflows from emerging markets have been unprecedented, and this trend can reverse in a meaningful way, only if there is visibility on the end of the Fed’s policy normalisation process.
Deepak Jasani, Head of Retail Research, HDFC securities said that if the interest rates keep rising or stabilise after rising more, then the lure of equity would reduce. “Some FPIs would want to rebalance their portfolio in favour of debt and sell equities.”
Other market experts believe that corrections in crude and commodities are likely to pause or reduce the intensity of FII outflows from the domestic equity space.
Pankaj Pandey, Head – Research, ICICIdirect said that commodity correction would temper inflation expectation, rupee pressure and FII selling, in our view.
Thus, we believe that crude and commodities could slow down the FII outflows as money is moving into commodity heavy countries currently, he added.
Yash Gupta – Equity Research Analyst, Angel One FPI flows will largely depend on the rate hike by the Federal Reserve in the US markets. If inflation starts coming down then that will be a good sign for emerging markets, he added.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)