Record outflows of Rs 201,500 crore (US$26 billion) by foreign portfolio investors (FPIs) since October 2021 have made it the largest sell-off in Indian capital market history. A major crash was averted when domestic institutional investors (DIIs), led by mutual funds, pumped out 240,250 rupees ($31 billion) over the period.
investment funds created
Rs 155,000 crore on the market since October with investors investing over Rs 10,000 crore each month through MF Systematic Investment Schemes (SIPs). Outflows due to continued selling of FPIs in the last seven and a half months have even surpassed the previous record sell-off of FPIs when Rs 116,250 crore or US$15 billion – at the current exchange rate – was withdrawn during the global financial crisis between January 2008 and March 2009. According to Data compiled by The Indian Express pulled FPIs over Rs 85,250 crore ($11 billion) out of India when the Covid pandemic hit the country in March 2020. However, markets retreated and later recovered as the economy recovered from the impact of the Covid pandemic.
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In 7.5 months
Outflows due to continued selling of FPIs over the last seven and a half months have even surpassed the previous record sell-off of FPIs when Rs 116,250 crore or US$15 billion – at the current exchange rate – were withdrawn during the global financial crisis between January 2008 and March 2009.
“Relatively high valuations in India, rising US bond yields, a strengthening dollar and concerns about a potential US recession triggered by aggressive tightening are factors behind FPI’s pullback,” said VK Vijayakumar, Chief Investment Strategist, Geojit financial services.
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As the global economy took a hit, central banks cut interest rates and announced loose monetary policies. While this helped economies recover and led to higher consumption, excess liquidity led to a major concern: inflation.
With inflation rising to new levels in major economies like the US and the eurozone, central banks have begun to tighten monetary policy and raise interest rates. In India, inflation rose to an eight-year high of 7.79 percent in April, prompting the RBI to hike the repo rate by 40 basis points to 4.4 percent. Inflation has risen to multi-decade highs in several economies. While US CPI inflation was around 8.3% in April, in the UK it rose to 7% in March, the highest in the series. Overall, annual inflation in the euro area hit a new high of 7.5 percent in April, according to an RBI report.
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This has led to a sharp sell-off in global financial markets since April. The Sensex is down 10.5 percent since April 4, when it closed at 60,611. If there was concern then about the pace of resolution by the major central banks, particularly the US Federal Reserve, there was concern about the impact of inflation and interest rate hikes on global growth.
“Recently there have been signs of selling exhaustion from FPIs and DII and retail buying is emerging as a strong counterbalance to higher level FPI selling. When global markets are stable, FPI sales are easily absorbed by DII plus retail purchases,” he said. As FPIs go on a selling spree, their shareholdings have fallen about two percentage points over the past two years to 19.5 percent as of March 2022, based on data reported by NSE500 companies. The rupee has also fallen over the past year.
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