An incessant rise in coronavirus infections in India seems to have made foreign portfolio investors (FPIs) circumspect on the prospects of Indian equities as the Indian market is likely to witness an outflow of foreign funds after six months of inflows.
Data from NSDL shows FPIs have taken out Rs 7,041 crore from Indian equities in April so far. In net terms, FPIs have taken out Rs 4,852 crore from the Indian financial market this month so far.
From October 2020 to March 2021, FPIs had been consistently buying in the Indian market as economic indicators showed signs of improvement after COVID-19 cases started to ease since October.
However, the month of April so far has been strongly volatile for the Indian market owing to a continuous surge in COVID-19 cases which triggered fresh restrictions from state governments, denting investor sentiment.
Equity barometer Sensex has retreated 4 percent this month while Nifty is down 3 percent.
"We are witnessing fresh lockdowns and restrictions being imposed by various state governments which will impact demand and also business activity. If the situation worsens further, we may see downgrades to
FY22 estimates which could lead to increase in valuations," said Rusmik Oza, Executive-VP & Head of Fundamental Research, Kotak Securities.
"Given the near-term challenges and sentiment, we can expect FPI flows to remain subdued in the near term. One good thing to happen for India is that inflows during good times are very strong and outflows during bad patches seem to be minimal. As and when cases subside in future we can expect the resumption of FII flows."
The storm-like resurgence in COVID-19 infections has added huge uncertainty regarding economic growth in FY22, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services pointed out.
"If the localised lockdowns and restrictions on economic activity continue for an extended period of time, there can be a downside risk of around 1 percent on the expected GDP growth of around 10 percent for FY22. This is the reason why FPIs have turned sellers amidst this uncertainty," Vijayakumar said.
Vijayakumar believes the impact on markets will be much lower since around 60 percent of Nifty earnings come from companies with global linkages, and he pointed out that segments like IT, metals and pharma
are doing well.
Analysts do not see other reasons for FPIs outflow other than the current COVID-19 situation.
"In the previous wave it had a profound economic impact and since markets are also at higher levels FPIs are probably pulling out. FPIs/FIIs have been net sellers in this month and without any major breakthrough in the COVID issue this situation may persist," said Vishal Balabhadruni, Senior Research Analyst at CapitalVia Global Research.
The peak of COVID-19 cases is expected in mid-May and without any concrete and major solution, there is little scope of change in the situation.
Flagship indices the Sensex and the Nifty hit their record highs of 52,516.76 and 15,431.75, respectively, in February and at the current juncture, Sensex is down 9 percent while Nifty is down 7 percent from their respective peaks.
Most experts are of the view that the market will remain volatile and uncertain in the short term due to the second wave of the coronavirus pandemic.
However, experts point out that after last year's experience and with the ongoing vaccination drive, markets might not correct as swiftly as the year 2020 and the situation may improve too as the government has announced vaccination for all adults.
Read more: Volatility is the new normal; what should be your strategy in such a market?
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