The flight of the foreign portfolio investors, in charts

With interest rates set to be hiked further in the US, the selling streak is unlikely to end soon. (MINT)
With interest rates set to be hiked further in the US, the selling streak is unlikely to end soon. (MINT)


  • FPIs have made record exits from the Indian capital markets in the last seven months, outdoing the outflows during the global financial crisis. However, domestic mutual funds stand tall

With a flight of nearly $23 billion out of India since October 2021, the nervousness of foreign portfolio investors (FPIs) is quite palpable in the stock markets. This protracted exodus, the longest since the 2008 subprime crisis, is visible across companies and sectors. At 22%, the FPI shareholding in India’s top listed companies sank to at least a six-year low in March after five successive quarters of decline, shows a Mint analysis.

Stakes were down 270 basis points (bps) in a year and 50 bps over a quarter. Foreign institutions pruned their shareholding in almost three of every five stocks. The analysis covered 398 BSE 500 companies whose latest shareholding data is available.

The sell-off has been triggered in part by global central banks abandoning their easy monetary policies amidst sky-high inflation, and now, due to the Ukraine war, which has raised input costs for companies. “Reversing fund flows aided the dollar, another reason for aggressively pulling funds from emerging markets (EMs)," said Shrikant Chouhan, head of equity research (retail), Kotak Securities.

With interest rates set to be hiked further in the US, the selling streak is unlikely to end soon. “A lot would depend on when the commodity inflation and supply shortage will end and when central banks signal that they are done with raising rates," said Deepak Jasani, head of retail research, HDFC Securities. Monies withdrawn will be, among other things, diverted to other markets like Australia, Indonesia or Malaysia that could benefit from high commodity prices and whose valuations are better than those of India, he added.

Selective bets

Despite dumping stocks across segments and heavily selling automobiles, financials, and construction materials stocks in 2021-22, FPIs have selectively added sectors to their portfolio. Retailing, telecom services, metals and mining, and textiles together saw net inflows of 35,322 crore last fiscal. Sectors that manage to pass on the rise in input costs to consumers without losing market share stand to gain.

“Historically, during periods of high inflation, commodity stocks have a dream on account of better realizations and optimum operational efficiency," said Nitin Agrawal, chief executive officer of Torus Oro, a financial firm. Consumer spending stocks get affected in such episodes as money loses its purchasing power, he said, adding that consumer and financial stocks may still face some price pressures since near-term catalysts for growth are not visible.

With valuations remaining high in India, the outflows can be seen from the prism of profit-booking, said Suvodeep Rakshit, senior economist, Kotak Institutional Equities.

FPIs’ sell-off in financials continued in the first fortnight of April, with outflows of 3,264 crore, the biggest for any sector in the period.

Contrarian moves

Even before the war, FPIs had been selling in India’s stock markets since October. However, they are undeterred in the primary markets, which include initial public offerings (IPO), qualified institutional buying (QIB) and rights issues.

During the IPO boom of 2021-22, which saw 53 issues mop up a record 1.1 trillion from the capital markets, investors, both foreign and domestic, jumped on the bandwagon.

Now with the IPO of Life Insurance Corp of India (LIC) set to finally see the light of the day this week, primary markets will breathe a sigh of relief. Issues worth over 1 trillion are waiting in the wings to tap the markets in 2022.

“FPIs may not come back in a big way now as compared to H1FY22 unless the valuations offered in the IPO are lucrative," noted Jasani. However, India-focused funds will keep participating in good IPOs, even though the level of oversubscription and euphoria may not be similar, he said.

Balancing act

As foreigners flee, domestic investors hold the fort. Mutual funds (MFs) have invested 1.4 trillion since October. This strong influx can be attributed to the absence of real yields in most asset classes, which made equities attractive and the strong trailing returns continued to reinforce the return expectations of households, Rakshit said.

In previous periods of steep stock market declines as well, MFs have largely countered the FPIs’ panic. During the 2008 crisis and amid global growth concerns around 2015-16, FPIs cumulatively pulled out nearly 80,000 crore, while MFs bought shares worth 95,000 crore.

“Certainly, domestic institutions and mutual funds are emerging as key drivers during times of uncertainties," Chouhan said.

This has also kept Indian indices supported: the Nifty 50 is down only 8% from its peak in October 2021. In previous instances, bouts of selling had dragged markets over 20 per cent.

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