But then, someone – the owner of the mangoes – comes and takes them to be served to someone else.
It’s a sad story, isn’t it?
Indian companies are also experiencing similar sadness because Foreign Institutional Investors (FIIs) Withdrawing your investment.
FIIs have been selling Indian shares continuously since October 2021. if someone asks why is the stock market fallingSelling of FIIs is a big reason.
In fact, from October 2021 to March 2022, FIIs are almost sold out 19.7 billion This is much more than the sales of 528.9 billion in 2008 – the year of the global financial crisis.
FII sales in the first 5 months of 2022 are more than the total FII purchases in 2021. This has taken FII investment in India to the lowest level in a decade.
But what suddenly changed? Why are FIIs selling Indian stocks in a big way?
Why are FIIs selling Indian shares?
#1 Global liquidity tightening
During the pandemic, the Reserve Bank of India (RBI) took several measures such as reduction in interest rates and increase in repayment period to address the liquidity crunch.
RBI went out on a limb. It took traditional and unconventional measures to ensure liquidity in money during stressful times.
However, with the Covid-19 situation finally relaxing, the RBI is also reversing its measures to ensure liquidity.
Like the RBI, the central banks of the US and England have also been taking measures to control liquidity. Therefore, global liquidity is hardening because Global interest rates are rising,
An increase in interest rates will reduce risk-free returns. The risk-free return will decrease because as interest rates rise, new bonds offer a higher rate of return.
Also, the price of existing bonds will fall as they have to remain competitive with newer bonds with higher interest rates.
Let’s take an example: Suppose the old interest rate is 9%, and the new interest rate is 10%. Bond X was issued at a price of 9% 100. After an increase in the rate of interest, a new bond ‘Y’ is issued with a price of 10% 100.
Hence Y will pay 1% higher fixed return than ‘X’, but, both X and Y are available at 100. In this case no one will buy ‘X’ as he pays less for the same price.
Therefore, the price of X has to fall in order to remain competitive. Let the price of X fall to 80.
As a result, an investor in ‘X’ will earn a fixed return of 9%, while the value of an investment will be reduced. 20.
Investors in old bonds will have to walk on a double-edged sword. They will earn interest at lower rates, and the value of their investments will also drop.
Therefore, to avoid this situation, FIIs are selling their investments in the Indian stock markets.
#2 Rupee fall
In 2022, there has been a drastic fall in the value of the Indian rupee against the US dollar. The lowest dollar exchange rate for 2022 is US$ 1 = . Was 73.8 on 12 January 2022.
This exchange rate is already high in itself but, it was the lowest point in 2022. This contrasting position clearly shows how sharply the rupee has depreciated.
The Rupee-Dollar exchange rate on 9 June 2022 was 1 US Dollar = 77.834, which is the lowest price ever. The exchange rate fell briefly in April. But around mid-May, it started rising again and has been rising steadily since then.
Of course, the domestic currency of FIIs is not the rupee. So, when they sell shares, they earn in terms of INR, but they have to convert INR to their home currency.
Conversely, Indian stock markets started to correct in 2022.
Hence, FIIs were losing the value of their investments in the current market scenario.
Corrections in markets combined with a falling rupee were reason enough to send FIIs packing home.
Also, in October 2021, Indian stock markets were rising while exchange rates were regulated. This means that it was a very good opportunity for FIIs to book profits on their investments. As a result, they were inspired to sell Indian shares.
#3 Ukraine Russia War
Exploring nature in the jungle is one of the best experiences for mankind. But, when a forest fires, you don’t wait for the tree next to you to catch fire. You leave the forest as soon as you come to know about the fire.
Ukraine-Russia War The tension was like this wildfire. With the prospect and rumours of World War III, an apparent panic grew among the FIIs.
Therefore, FIIs began to withdraw their money from all emerging markets, because with or without a world war, emerging markets would suffer the most.
So it is certain that FIIs are selling. But where are they investing?
In 2022, FIIs pulled out a lot of money from many countries. But at the same time it has invested huge amount of money in other countries as well. Investment has shifted from imports to exporting countries, but why?
Read on to find out why?
Why shift?
When war occurs, the global import-export cycle is affected, not to forget that Ukraine and Russia are both major exporters. Therefore, when their commercial operations were disrupted, the prices of the goods they exported went up globally.
Global Crude oil prices hit their all-time high in 2022. This affects the prices of all goods as the supply chain becomes costlier. Therefore, all commodities become expensive.
As a result, the exporting countries are now at an absolute advantage as they can sell their products at inflated prices.
FIIs saw this opportunity and started shifting their investments from importing countries to exporting countries.
FIIs invested the most money in these countries: US$12,686 in Brazil, US$2,663 in Thailand and US$1,344 in Indonesia.
But why did investment increase in these three countries in particular? Let’s find out why
Why this country?
Russia is one of the leading exporters of crude oil and energy products. Ukraine exports a huge amount of raw materials for iron, steel, mining, agricultural and chemical products, metals and machinery.
Brazil was the 9th largest exporter in the world. With the supply of crude from Russia dwindling, Brazil is rolling in the money as its exports rise sharply.
Brazil, being a supplier of crude oil, received maximum investment from FIIs. Next in line in Thailand.
Thailand thrives on exports. 65% of its GDP comes from exports. Thailand exports machinery and electrical goods. Many of these were sold by Ukraine. Therefore, in March 2022, Thailand exported a record-high of US$ 28.9 billion.
Indonesia also exported a record-high of US$ 26.5 million in March 2022. This is 44.4% higher on a year-on-year basis. After oil and gas, Indonesia’s most important exports are coal, steel, nickel and other metals.
So it suffices to say that Brazil, Thailand and Indonesia use Russia and Ukraine. Therefore, surprisingly the exports of these countries have increased.
This is a clear investment opportunity and FIIs are making the most of it.
Will FIIs come back to India?
Indian stock markets are in almost perfect condition. Companies are reporting fourth quarter results. In these results, a clear recovery from the era of Kovid-19 can be seen.
This has triggered a wave of positivity in the Indian stock markets. So, we can see that Indian stock markets are recovering in some way or the other. FII outflows have been less as compared to the previous month.
In addition, there was a change in FII investment due to rising commodity prices and reduced exports from Russia and Ukraine.
Therefore, when the Russo-Ukraine war situation normalises, commodity prices will drop below their highs. Russia and Ukraine will not be able to regain their export levels immediately, but there will be some clear and gradual change in the export ratio.
Another effect of the normalization of the war situation would be that the dollar would lose its price position. In this case the rupee will strengthen.
Therefore, all the reasons for FIIs moving away from India will be curtailed. The negative will gradually turn into a positive, and FIIs will come back to India.
An interesting scenario emerged in this historic FII sell-off, that the decline in the indices has been negligible as compared to the sell-off by FIIs.
but why?
Why didn’t the stock market fall drastically? Did you manage to keep up with the market?
Stay tuned to this platform to know.
Happy investment!
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com