The Indian financial markets are witnessing FPI selling after three months of net inflows as FPIs remained net buyers for three consecutive months, from June to August.
Foreign portfolio investors (FPIs) have taken out Rs 3,475 crore on a net basis so far in September from Indian markets as participants turned cautious in the absence of fresh positive triggers amid fears of a resurgence of coronavirus cases.
As per data available with NSDL, FPIs have taken out a net Rs 7,241 crore from equities and invested a net sum of Rs 3,766 crore in debt instruments during September 1-28 period, which turns out to be a net outflow of Rs 3,475 crore.
The Indian financial markets are witnessing FPI selling after three months of net inflows as FPIs remained net buyers for three consecutive months, from June to August. They had invested Rs 43,770 crore in August, Rs 5,087 crore in July, and Rs 20,287 crore in June on a net basis.
What triggered the outflow?
The biggest reason behind the cautious stance of FPIs, as per analysts and market observers, seems to be the fear that a fresh lockdown may be imposed as the COVID-19 cases saw a spike. Some of the European countries have announced a second lockdown.
Experts pointed out that the resurging fear of the second wave of virus-related cases in developed countries coupled with bleak economic data especially in the USA as pointed out by US Fed officials led to a selloff in risky asset classes.
Besides, the volatility and uncertainty in the US markets have also weighed on FPIs sentiment.
While concerns over rising COVID cases and the faltering economy remain, Pankaj Pandey, Head of Research, ICICI Direct pointed out that in a key market like the US, there is uncertainty whether they will be able to extend the fortnightly benefit to the settlement that they had been offering.
"So, there was a risk-off event and as a result, the markets in the US corrected and we also saw correction," he said.
Pandey believes the extension of that fortnightly scheme will happen after the US elections only and the market may remain cautious.
Another reason behind the FPI selloff appears to be the rise in the US dollar index which triggered the dollar outflow from the emerging markets.
"An increase in the US dollar index for an extended period as foreign investors sought refuge from the risk posed by pandemic saw a dollar outflow from the emerging markets. Investors preferred safe-haven assets like the US treasury after an aggressive run-up in the equity market despite a contrasting economic data with a grim outlook," said Dinesh Rohira - Founder, CEO - 5nance.com.
"It can be understood that investors are approaching prudently to re-strategies the allocation as the market is likely to remain volatile as we approach closer towards the US Presidential elections and domestic State election starting from October last week," Rohira said.
Arjun Yash Mahajan, Head – Institutional Business at Reliance Securities is of the view that FPIs selling in equity markets in India and globally is due to profit-booking, which was on the back of the sharpest recovery post the fall seen in March 2020.
"The multiple events ahead over the next one quarter are keeping the investor’s at bay and swift move in dollar index from the lower range of 92 to 94 levels is putting pressure on commodities and emerging markets," Mahajan said.
Mahajan added that Nifty was trading at 21 times, above its 10-year long term average of 18 times, and the sharp up-move over the last 5 months was a concern.
"The dichotomy between the economic fundamentals and the market levels had to come to the front sooner rather than later," Mahajan said.
The road ahead
The market may continue to see volatility for some time due to COVID, US elections and geopolitical reasons. However, liquidity may keep the market away from a bearish phase.
"Some bit of volatility and consolidation can happen. However, structurally, we may see decent liquidity for a good period of time," Pandey said.
Experts believe the recent communication of the new Federal Reserve policy framework by Chairman Jerome Powell that monetary policy will stay extremely loose for longer will keep key rates lower and will be a positive sentiment booster for the global markets.
But the US election will be a major event for markets across the globe.
"With the US elections approaching in what will be a highly contested battle, there is a fair amount of volatility, which may act as a spoilsport," said Devang Mehta, Head–Equity Advisory at Centrum Wealth Management.
"Locally, a significant deceleration in growth could be seen, as the surge in demand related to the reopening of the economy will fade. India-China tensions on the border are another variable, which comes into the proceedings intermittently. Valuations have also started to look a bit stretched, in the absence of earnings growth," Mehta added.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.