Higher US yields, risk-off sentiments turn FPIs net sellers of equities in Sept

Foreign portfolio investors (FPIs) have turned to become net sellers of Indian equities in the last few days, contributing to a steep correction in the markets. FPIs have been net sellers of equities worth more than ₹17,000 crore since 14 September and the Nifty has corrected by 1,100 points.

The monthly trend that had turned positive since July and contributed to a rebound in the markets has seen a reversal in September with FPIs having sold equities worth ₹5,156 crore till the 27th. The provisional data for 28th suggests that FPIs sold equities worth ₹2,772.49 crore in net value.

The trend is likely to continue in the near-term, said experts. They expect the pressure on equity to continue along with volatility in FII flows.

“Since the rate hike by the US Federal Reserve, resulting in higher yield from fixed income securities in the US markets, there has been redemption pressure across equity markets, which has been influencing profit booking by FIIs and aggressive selloff for near term,” said Mitul Shah, head of research at Reliance Securities Ltd.

Other reasons for outflows include the external factors that have been worrying global investors leading to increased risk-off sentiments. Post the rate hikes in the US and expectations of more, not only have the US bond yields risen, but various countries have also been raising interest rates, leading to concerns of a global slowdown and recession. Geopolitical issues are proving to be a further dampener while a strong dollar and weakening other currencies, including rupee, are leading to profit booking by FIIs. For India, apart from rupee weakness, rising trade deficit has also been a concern.

Further, the valuation of the Indian equity market is at the premium end at present, making risk averse investors stay away, said analysts.

However, some market watchers are optimistic that the current selling spree will abate in time. “Lot of funds and investors looking at other risky assets to garner higher returns do prefer India. The returns from India have always been rewarding,” said G. Chokkalingam, founder and managing director, Equinomics Research and Advisory.

Hence, over time, or possibly after another round of rate hikes, higher US yields will be completely factored in and foreign fund inflows into Indian equities may rise, he said.

Deepak Jasani of HDFC Securities said that once there is clear signal that US Fed is done with rate hikes, FPI flows into India will increase.

One supporting factor for the Indian markets is softening of crude oil prices on the back of rising slowdown fears. This adds to gains for India and will also support the rupee along with other measures to be taken by the Reserve Bank of India (RBI). The rupee already has proved to be a much better performing currency than those of other emerging markets. This is likely to support flows.

India’s growth rate is itself a compelling factor for foreign investors. The world gross domestic product (GDP) growth including China is now expected to be less than 3% during 2022, while Indian GDP growth of 7% is the most compelling factor for FPIs.

Manish Jain, fund manager, Coffee Can PMS, Ambit Asset Management, said: “We believe that the fundamentals of the Indian economy are on a very strong footing. Inflation is under control and the earnings growth outlook is steady.”

This essentially means that India remains one of the most favoured investment destinations in the world, Jain said. He remains optimistic about the FII flows for the near to medium-term perspective.

The key risk is tightening by RBI that puts currency, liquidity, and demand all under the scanner. Hence, Jain said that the central bank will need to do a very fine balancing act.