Longer-term outlook remains intact: FPI outflows to continue amid global uncertainty

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Foreign portfolio investors are expected to continue selling stocks for some more time as the easy money era has come to a decisive end. As fears of a recession accelerate with the US Federal Reserve steadily hiking rates, experts expect selling to continue. According to data available on Bloomberg, FPIs have sold Indian equities worth $25.3 billion so far in CY22, which surpasses the previous record outflows of $12.9 billion during the 2008 financial crisis.

Escalating inflation, weakening of the rupee and the US Fed’s decision to raise interest rates aggressively have forced foreign fund managers to take money off risky emerging markets, including India. On Wednesday, the Fed hiked its benchmark rate by 75 basis points and said it is “strongly committed” to bring down inflation to 2%, indicating more hikes in upcoming meets.

The exodus of foreign investors from the Indian markets is likely to continue amid expectations of further rate hikes by the US Federal Reserve and uncertainty over the geopolitical scenario. “The risk aversion, coupled with the uncertainty around the Russia-Ukraine war and the China slowdown, will keep the pressure on all emerging markets, including India, in the short term,” Vivek Sharma, head – international clients group, Edelweiss Wealth Management, told FE. He believes that flows could only reverse if inflation growth slows down and markets begin to get confidence from global central banks’ efforts to moderate the pace of inflation through monetary policies.

Selling by foreign fund managers was also due to rich valuations of Indian markets which were even twice the valuation of some EMs. At the peak in October 2021, Nifty was trading at 22.77 times its one-year forward earnings. Speaking to FE, Nilesh Shah, group president and MD, Kotak Mahindra AMC, said, “FPIs are selling India as we trade double the valuation of EMs and have delivered double the return of our peers in last eight years. They are selling because they have a profit to book as well as exit in India.”

Since October last year, Indian markets have seen the second-highest FPI outflows at $30.06 billion. Taiwan topped the chart with outflows of $30.7 billion. Financials and technology stocks, where FPIs park almost half of their money, witnessed massive selling during the period, whereas companies in staples were the most sought after.

Going forward, even when major central banks expect to control macro factors, experts believe that timing inflation and interest rates will remain difficult. “Timing interest rates and inflation is not easy, nor by the central banks or anyone else,” Saurabh Mukherjea, founder, Marcellus Investment Managers, told FE.

However, the longer-term outlook for flows into Indian equities remains strong based on several factors, including large corporate mergers and more foreign investors signing up for India. “There are three critical triggers in terms of FPI flows. Firstly, given that investors are huge investors in both HDFC and HDFC Bank, a green signal from the RBI on the merger deal will have a significant bearing on FPI flows. There is also heightened interest from first-time FPIs towards India, and any regulatory development to shorten the sign-up process from two-three months to become a registered FPI will further accelerate flows,” said Mukherjea.

Additionally, given the backdrop of growth slowdown in the US and EU, and uncertain economic outlook for China, India will remain attractive to global investors. “Reversal in flows will happen when Fed signals a pause. Markets now will focus on weakening macro aggregates, the Covid situation in China and the Ukraine conflict,” said Somnath Mukherjee, managing partner, ASK Wealth Advisors.