Indian equities raise nearly Rs 2.5 lakh crore from FPIs in 7 years, lose it all in 8 months

The unprecedented exodus of foreign portfolio investors through the past eight months seems to have undone their seven years of investments in Indian equities.

Foreign investors have net sold Indian stocks worth Rs 2.5 lakh crore, or $32 billion, since last October in one of the largest-selling sprees by the cohort ever seen on these shores, according to data available on the National Securities Depository Limited (NSDL).

For perspective, foreign investors net invested Rs 2.2 lakh crore between 2014 and 2020 in the domestic stock market, NSDL data showed. Read another way, the recent selling pressure has more than halved the Rs 4.4 lakh crore the foreign investors pumped into the domestic secondary market between 2010 and 2020.

The intense and unceasing selling by foreign investors since last October was triggered by rising global interest rates, multi-decade high inflation in Western economies, a geopolitical crisis in Eastern Europe and rising unattractiveness of Indian stocks because of their rich valuations.

India is not alone in seeing net outflows from foreign investors. Emerging markets like Taiwan and South Korea, which also made big money for FPIs in 2020, have also seen sharp outflows from their equity market due to policy shocks and slowdown in the local economy.

As per CLSA, foreign investors have withdrawn $28 billion from Taiwan in 2022 so far, while they have taken out $12.8 billion from South Korean equities.

Despite the never-seen-before selling from foreign investors, the benchmark Nifty 50 index has fallen merely 8 percent since October and has outperformed major markets like the US, China and Europe in that period.

The credit for the Indian markets, avoiding a collapse due to the extent of selling from foreign investors lies with the emerging buying power of retail investors and domestic institutional investors.

Finance Minister Nirmala Sitharaman termed it the “shock-absorbing” capacity of domestic retail investors who have directly net invested Rs 2.1 lakh crore in 2021 and 2022 offsetting the Rs 2.2 lakh crore of net selling by foreign investors in the same period.

In addition to the direct investments by retail investors, domestic mutual funds, whose 55 percent of assets are owned by retail investors, have net invested Rs 1.1 lakh crore in 2021 and 2022 so far.

“It appears that the current strength in domestic inflows is far higher than any previous declines. This has limited price damage despite record outflows from FIIs,” brokerage firm CLSA India said in a note.

The strength of the domestic buying has also meant that this is the slowest correction that the Nifty 50 index has seen after hitting an all-time high and has managed to outperform emerging market and Asian peers by as much as 7-percentage points.

Brokerage firm Kotak Institutional Equities believes that the liquidity provided by domestic investors over the past 18 months could also soon run dry if the market continues to remain in current state of flux.

“Weak trailing returns and rising deposit rates may test the continued faith of retail investors,” Kotak Equities said in a recent note. The brokerage firm argued that trailing 12-month returns of Indian equities will turn negative in a few months even if markets were to remain flat, while at the same time fixed deposits rates are on the rise due to rising interest rates.

“The confluence of these two factors may have a strong bearing on absolute return expectations from equities as also relative return expectations across asset classes for retail investors,” Kotak Equities said.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.