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FIIs pull out more than $29 bn in FY22 amid high valuations, US Fed rate hike fears, geopolitical tensions

The process of FII capital returning to India is expected to take time given the high valuations and risk to corporate earnings. Recently ended December earnings season clearly indicated that corporates face margin pressure due to higher input costs.

February 26, 2022 / 07:30 AM IST

Money flow from foreign institutional investors (FII) is always a crucial factor for emerging markets including India, but this financial year domestic institutional investors including retail investors seem to have played a big role by supporting the market on every downside, though they could not match the FII flow.

In the year ending March 2022 so far, FIIs have net sold more than $29 billion worth of shares (Rs 2.22 lakh crore) and 80 percent of that was seen in the last five months.

The reasons are few but very strong. High valuations after a healthy run towards a record high of 18,604 on the Nifty in October 2021 with a gain of more than 32 percent from January 2021, and rising expectations of more rate hikes by the US Federal Reserve to fight elevated inflation are major reasons for FII outflow. Analysts globally expect 5-7 policy rate hikes by the Fed in 2022.

And now geopolitical tensions between Ukraine and Russia have spurred the flight of FII money from India. Russia started off invasion of Ukraine from Thursday morning with Moscow military & vehicles entering into Ukraine via Crimea, and later Western countries imposed severe sanctions on Russia to hurt its economy.

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This resulted in nearly 13 percent correction in the equity market from record highs and several stocks traded far off their all-time highs.

"Foreign capital has a tendency to leave faster than they enter in adverse macroeconomic and geopolitical events. The Russia-Ukraine standoff can be expected to play catalyst and further accentuate outflow of foreign capital," says Rakesh Singh, CEO at Fisdom Stock Broking.

The process of FII capital returning to India is expected to take time given the high valuations and risk to corporate earnings. Recently ended December earnings season clearly indicated that corporates face margin pressure due to higher input costs. With elevated commodity prices including oil at more than $100 a barrel, the earnings risk seems to be rising, experts feel.

Respite to the ongoing selling pressure from FIIs may not be forthcoming anytime soon as the country’s valuations are steep, Aditya Suresh, head of research and strategy at Macquarie Securities India, told CNBC-TV18 on Thursday.

"India is not a blanket buy anymore as there is a lot of earnings risk and valuations are steep," Suresh said. Most analysts expect Nifty earnings to grow around 20 percent in the next year and 25-30 percent in the current financial year.

According to Rakesh Singh, as the situation de-escalates and defuses, foreign capital can be expected to find its way back into Indian markets especially into opportunities created by the event-led displacement.

On the contrary, domestic institutional investors have managed to compensate the FII outflow to a major extent as they have net bought more than $23 billion or Rs 1.73 lakh crore worth of shares during the current financial year ending March 2021 as they remain confident about India's growth story especially after several initiatives taken by the government and Reserve Bank of India in the last few years to boost the economy.

In fact, they have been net buyers for every month since March 2021.

Mutual funds have also been net buyers during the financial year as they poured in nearly Rs 1 lakh crore in equities and remained buyers every month since July 2021.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.



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Sunil Shankar Matkar
first published: Feb 26, 2022 07:30 am
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