The value of the foreign portfolio investors (FPI) holdings in the domestic equities dropped 14 per cent to USD 523 billion in the three months ended June 2022 from the preceding quarter, according to a Morningstar report. This was the third consecutive quarterly decline in the value of FPIs' investments in Indian equities.
Foreign investors were cautious since the start of the year and it intensified as the year progressed, following the influence of worrying trends in both global and domestic markets. "During the quarter ended June 2022, the value of FPI investments in Indian equities fell by 14 per cent to USD 523 billion from USD 612 billion recorded in the previous quarter," the report noted.
As of June 2021, the value of FPI investments in Indian equities was USD 592 billion. FPIs' contribution to Indian equity market capitalisation also fell during the quarter under review to 16.9 per cent from 17.8 per cent in the March quarter.
Offshore mutual funds form an important component of total foreign portfolio investment, apart from other large FPIs, such as offshore insurance companies, hedge funds and sovereign wealth funds. During the quarter ended June 2022, FPIs sold net assets worth USD 13.85 billion. It was, however, lower than the net pull out of USD 14.59 billion seen during the quarter ended March. During the quarter ended June 2022, FPIs sold net assets worth USD 13.85 billion.
Foreign investors' sentiments were dented from the start of the quarter with the US Federal Reserve continuing with its aggressive monetary policy stance. The bond yields also surged globally on the expectation of a rather prolonged hike in interest rates by the Fed, which made investors risk-averse, Morningstar said in its report. Moreover, volatile crude, rising commodity prices, and no positive development in the Russia-Ukraine conflict amplified investors' woes, it added.
The Fed has so far hiked interest rates by 150 basis points in 2022 and is expected to continue with its aggressive rate-hike stance for the remaining months of the current year. Apart from global factors, the scenario was not encouraging on the domestic front too. Rising inflation continues to be a cause for concern, and to tame that, the Reserve Bank of India has also been increasing rates.
"The Fed's aggressive rate hike would most likely push RBI to hike rates further over the next two or three quarters, which would have a direct bearing on the country's GDP growth and market movement. Since May, the RBI has hiked repurchasing option, or repo, rates by 140 basis points," the report noted. These factors have turned foreign investors risk-averse and hence they stayed away from investing in emerging markets like India.
Another important aspect which contributed to the outflows from domestic stock markets during the quarter is their valuation, it added. However, the scenario improved in July and FPIs turned into net buyers in Indian equities after nine consecutive months of net outflows.
"This reversal in net outflows cannot be construed as a change in trend or consider that FPIs have made a complete comeback and it may take a while for clarity to emerge. The flows have also been largely driven by short-term trends, so we have yet to see long-term money come into the Indian markets, which is stickier," the report noted.