Foreign Portfolio Investors (FPIs) sold ₹33,922.7 crore worth of Indian shares in January, extending their selling run since October. A four-month selling spree by foreign investors was last seen in March 2017. The selling has been more aggressive in the last two weeks as rising US yields and multi-year high oil prices have prompted them to dump emerging market assets, such as Indian equities, which have more than doubled in the last 22 months from the post-Covid pandemic lows. In the derivatives segment, foreign investors have cut their bullish bets to the lowest since May 2020, with the long-short positions ratio dropping to 28% – a level which was last seen on May 18 last year.
“We’re seeing a bit of reality returning and bubbles deflating,” Hugh Young, chairman of Aberdeen Standard Investments Asia told ET. “We had the momentum of low interest rates and easy money propelling high valuations, particularly in the tech/IT sphere.”
The liquidity boom that sparked a record-breaking run in Indian equities as well as others is set to dry up as the US central bank winds down policy support and begins raising interest rates from March. US bond yields have increased on expectation that the Fed will raise rates. Meanwhile, crude oil prices have risen to multi-year highs on expectation of strong demand and due to rising tensions between Ukraine and Russia.
Indian markets are off 8% from their record highs hit in October 2020 due to these concerns besides high number of Covid-19 cases. The Nifty ended at 17,101.95 and the Sensex finished at 57,200.23 on Friday.
Friday marked the 12th straight day of selling by FPIs. The outflow of overseas money in January for India was the highest among the major Asian markets.
The likelihood of foreign flows coming back to emerging markets depends on a clearer signal from the Fed or from the markets, said Krishna Memani, CIO at Lafayette College’s endowment fund.
“Right now, inflation and employment data are likely to tick up rather than go down,” said Memani. “Domestic investors have been net sellers for quite some time and domestic retail investors have had their hands burnt because of new-age companies.”
Foreign investors might come back in March when they get an idea of how big the reduction in the balance sheet is and the quantum of rate hike becomes clearer in the Fed’s rate-setting meeting during the month, said Andrew Holland, CEO, Avendus Capital Alternate Strategies.
“If the global economy weakens further and the Fed slows down on its tightening cycle, the liquidity may remain ample which is good for emerging markets,” he said.
With the Budget coming up on Tuesday, foreign investors are watching out for announcements on capital expenditure, government borrowing, fiscal deficit and taxation.
“India of all emerging markets is the fastest growing economy, which is a positive, but global investors are questioning that in the context of high oil prices. I don’t see how the Budget can change things significantly for Indian equities in the context of high oil prices and rising interest rates globally,” said Memani.
