fpi: Amid rate hikes, turnaround in FPI equity flows requires strong earnings show by India Inc

The quantum of the selling by foreign institutional investors – Rs 1.8 lakh crores since October 2021 – is of the greatest magnitude since the Global Financial Crisis (GFC) and going by the numbers so far this month, the selling pressure is showing little signs of abating.

Overseas investors have pared their exposure to Indian debt assets by Rs 10,418 crore so far in 2022, the data showed.

Key among the factors leading to the exodus of global capital from India’s equity markets is the aggressive monetary tightening plan outlined by the US Federal Reserve, which has led to international funds flowing back to the world’s largest economy.

According to an economist from

, in the current financial year, India may not be able to attract much foreign portfolio investment owing to a number of factors.

“The present situation where inflation is high and central banks in the West are aggressive in raising rates does not augur well for investments in the fixed income segment. Therefore debt inflows could be shaky this year,” Bank of Baroda’s Economist Jahnavi wrote.

“For equity flows to turnaround, there must be strong signals either on corporate earnings or policy reforms given that the days of easy monetary policy are over. Further, the fiscal stimulus in our context has been limited. Therefore, even on the equity side, there may not be significant inflows.”

The corporate earnings for the previous quarter that have been declared so far paint a mixed picture when it comes to India Inc’s performance in January-March.

While the Indian government did set aside its earlier fiscal consolidation roadmap in order to support economic growth during the pandemic, the Centre took a much more measured approach when it came to fiscal stimulus than many advanced economies.

The Reserve

, on the other hand, extended significant monetary accommodation during the COVID crisis, slashing interest rates and infusing massive amounts of liquidity in the banking system.

That accommodation, however, is now being reversed as inflation remains well above the central bank’s target. Last week, the RBI raised the repo rate by 40 basis points and increased the Cash Reserve Ratio (CRR) for banks by 50 basis points.

In the current year, the best-case scenario for foreign portfolio investment would be marginally positive net flows, Bank of Baroda’s economist wrote.

“But for this to work out, the economic numbers that come out must be very positive. In short, FPI flows may not provide too much support to the balance of payments and we may have to rely more on FDI to counter the higher current account deficit (CAD),” she wrote.

While FPI inflows have been different across different sectors, the financial sector topped the chart over the years as the largest contributor of over $183.3 billion in the previous financial year, Bank of Baroda’s report said.

This was followed by investments in oil and gas, utilities and the automobile sector.

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