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Foreign portfolio investors are likely to remain net sellers of Indian equities for the foreseeable future, having already sold equities worth $27,376 million by 21 June.

The outflows from India are much higher than in many other emerging markets such as South Korea, the Philippines and South Africa. Only Taiwan has seen higher outflows of $32,705 million till 22 June. Many emerging markets such as Indonesia, Thailand Brazil and Malaysia have seen net inflows, which is attributed to these countries being commodity producers.

While the FPI selling in India has remained higher than many other EMs, analysts say India had seen higher allocations too compared with smaller markets and therefore they are not surprised at higher outflows. Though India remains better positioned than many other EMs because of its high GDP growth, strong demand outlook and good corporate balance sheets, experts say FPI selling and foreign outflows may still continue from India.

As per analysts, there is no change in the key fundamentals that had prompted FPIs to go on a selling spree. Further, India’s valuations are still at a premium to other emerging markets, despite steep corrections. “India is still trading at premium valuations compared to other EMs, despite recent correction," said Mitul Shah, Head of Research at Reliance Securities.

The Indian market is trading at 17.2 times leading price/earnings (P/E), which is closer to the 10-year average, but it’s still expensive compared to most of the other emerging and developed markets, as per Aishvarya Dadheech, Fund Manager at Ambit Asset Management. Most of the markets are trading between 8 to 15 times P/E as per Dadheech while the US is trading at 16 times P/E and China at 10 times P/E.

Experts believe that FIIs are not likely to change their stance toward emerging markets in the near term. “There is no reason for FIIs to change their selling strategy since the dollar continues to be strong and US bond yields are attractive and expected to rise further", said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

The recent pull-out has been triggered by aggressive rate hikes by the US Federal Reserve and other central banks around the world. The rate hikes are likely to continue as inflation expectations remain beyond comfort levels. Thus FII selling is likely to remain volatile in the coming days, amid the high prospect of aggressive rate hikes, said analysts. Ongoing geopolitical tensions amid Russia’s invasion of Ukraine also weigh on FPIs’ buying sentiment.

“FII selling is expected to continue till a large part of this CY22," said Dadheech. This is because the US FED will raise rates by at least 150 bps in its next two meetings and the ECB will also join the FED in shrinking its balance sheet. The money flow out of emerging markets will continue with this change in monetary policy and global growth slowdown

Once globally expectations settle down for inflation, interest rate and growth, it is then that investors will recognize that India is “an island of relative stability" which should attract FII inflows, said Nishit Master, Portfolio Manager, Axis Securities. In addition, one reason that could influence FPIs moving forward is remains China factor. China has a dual impact, said, experts. Their annual politburo meeting is likely in November, and there’s an expectation that they will start stimulating the economy. It will be good from a demand-side perspective and also from the perspective of overall global investor risk appetite toward emerging markets.

China is the single biggest emerging market for global portfolios - it’s over 30% of the MCSI EM index, said experts. If China suddenly starts becoming more attractive, then flows will come back into EM funds and that will lead to more flows into India as well.

Ujjval Jauhari
Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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