After infusing huge amounts of money for three consecutive years, foreign portfolio investors largely retreated from Indian equity markets with the highest annual net outflow of around Rs 1.21 lakh crore in 2022. Experts said the huge outflow, which surpassed the previous record of Rs 53,000 crore net withdrawal in 2008, came amid aggressive rate hikes by central banks globally, but has implications for overall macroeconomic trends in India in 2023. Hoping for positivity.
In addition to global monetary tightening, volatile crude oil, Russia as well as rising commodity prices and ukraine The conflict led to an exodus of foreign money in 2022.
Going forward, the quantum of FPI outflows may not be as large as in the first half of 2022, as India’s growth is relatively promising compared to other developed and emerging economies, said Manish Jeloka, co-head of products and solutions at Sanctum Wealth. Is. ,
Sanjeev Bajaj, joint chairman and managing director of Bajaj Capital, said FPI flows in 2023 will be determined by several factors such as the policy stance of the US Federal Reserve, volatility in oil prices and developments in the geopolitical situation.
As of 28 December, foreign portfolio investors (FPIs) have net withdrawn Rs 1.21 lakh crore (about USD 16.5 billion) from the Indian equity markets and about Rs 16,600 crore (about USD 2 billion) from the debt market . As per the data available with the depositories.
This was the worst year for FPIs in terms of inflows and outflows from equities after net investment in the last three preceding years.
FPIs made a net investment of Rs 25,752 crore in equities in 2021, up from Rs 1.7 lakh crore in 2020, which was the best year, to Rs 1.01 lakh crore in 2019.
Net outflows were last seen in 2018 (Rs 33,000 crore), while 2022 will be only the fifth year in the history of FPIs when they have been net sellers of Indian equities – the other three being 2011 (Rs 27,000 crore), 2008 (Rs 53,000 crore) and 1998 (Rs 740 crore).
This year, most major central banks began normalizing monetary policy, resulting in the departure of hot money from emerging markets, including India. This resulted in an unprecedented rise in prices (inflation) in most economies, Bajaj said.
The scenario on the domestic front was also not encouraging. Himanshu Srivastava, Associate Director-Manager Research, Morningstar India, said rising inflation remains a cause for concern and to contain it, the RBI has also hiked rates, which casts a shadow over the growth prospects of the domestic economy.
He added that another important factor that led to the outflow from domestic stock markets was its high valuation compared to other related markets.
As a result, foreign investors are booking profits here and shifting their focus to other markets which are attractive on valuation and risk-reward front.
“The outflow of foreign portfolio equity investments was driven by low investor risk capital and monetary tightening rather than India-specific factors,” said Pradeep Gupta, co-founder and vice-president, Anand Rathi Group.
In the debt market, FPIs continued their selling for the third straight year with a net outflow of Rs 16,600 crore in 2022. He had made a net withdrawal of Rs 10,359 crore in 2021 and Rs 1.05 lakh crore in 2020.
FPIs have used the debt segment for parking investments from a short term perspective due to uncertainties on the equity side. Accordingly, they kept on intermittent buying in the debt segment, thereby checking outflows from the segment, said Srivastava of Morningstar India.
“Broadly speaking, from a risk-reward perspective and with interest rates rising in the US, Indian debt does not appear to be an attractive investment option for foreign investors,” he added.
India receives 2-3 per cent of global cross-border portfolio equity inflows on an average. Since 2000, the current year will be only the fourth year that net outflows will be seen in Indian equities.
In the past, whenever there has been an outflow by foreign investors from equity, the immediate result has been a strong inflow. Anand Rathi Group’ Gupta said that during 2008, 2011 and 2018, India received an average annual inflow of USD 20 billion for the next few years.
“Going from the previous examples, India Substantial foreign portfolio equity inflows are expected to be received during 2023 as well,” he said.
Heavy selling by FPIs has been absorbed by domestic institutional investors (DIIs), including mutual funds and insurance companies. This is a reflection of the growing clout and maturity of domestic investors.
FPIs started the year 2022 on a negative note and the departure of “hot money” continued till June. In the first six months of this year, they pulled out Rs 2.17 lakh crore from equities, mainly due to central banks globally and the US Fed in particular. The Reserve is ending its ultra-easy pandemic-era monetary policy.
This was followed by a series of aggressive rate hikes which kept the liquidity in the system in check.
FPIs gradually started making a comeback in Indian markets with a net investment of Rs 4,989 crore in July and Rs 51,204 crore in the following month, as the Indian economy as well as Indian markets have been more resilient during these testing times .
However, he again withdrew money in September and a smaller amount in October. A change in FPI stance has been observed since the last week of October as they started pouring in money and the momentum continued in December as well.
This positive trend can be attributed to the resilience shown by Indian markets amid global turmoil, moreover, stabilizing inflation numbers in the US have raised hopes that the US Fed may not go for further aggressive rate hikes. can go.
Before pulling out of equities in 2022, FPIs banked on the ultra-loose monetary policy of major central banks for the past three years to support their respective economies as liquidity flooded into the global financial system.
A large part of this money went to emerging markets in pursuit of higher returns. Sanjiv Bajaj said this was the reason for higher FPI inflows in emerging markets including India in 2020 and 2021.
In terms of sectors, since FPI inflows have reversed from July 2022, they have added the most in financials followed by consumption and capital goods.
Financial services accounted for 26 per cent of the total net inflows of Rs 85,000 crore during July-November this year, on the back of improving credit demand, while recovery in demand after peaking inflationary factors and imminent increase in capex turn positive are possible reasons. on consumption and capital goods, respectively, said Sanctum Wealth’s Jeloka.
On the other hand, FPIs have been seen reducing their positions in information technology stocks, which can be attributed to higher valuation levels as well as the impact on spending due to the bearish environment overseas.
Going forward, in the short to medium term perspective, FPIs are expected to continue with their investments in Indian equities, but in a restrained manner, said Morningstar India’s Srivastava.
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(This story has not been edited by News18 staff and is published from a syndicated news agency feed)