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FPI holdings in domestic equities down 6% at $612 billion in March quarter, report says

Consequently, FPIs’ contribution to Indian equity market capitalisation also fell during the quarter under review from 18.3 per cent to 17.8 per cent.

Dollar FPI
This was largely on the back of a massive sell-off by foreign investors and correction in the Indian equity markets. (Representative image)

The value of foreign portfolio investors’ (FPI) holdings in domestic equities reached USD 612 billion in the March quarter, down 6 per cent from the preceding quarter, according to a Morningstar report.

This was largely on the back of a massive sell-off by foreign investors and correction in the Indian equity markets.

At the end of March quarter, the value of FPI investments in Indian equities fell to USD 612 billion, which was lower than USD 654 billion recorded in the previous quarter, a fall of around 6 per cent, the report noted.

In March 2021, the value of FPI investments in Indian equities was at USD 552 billion.

Consequently, FPIs’ contribution to Indian equity market capitalisation also fell during the quarter under review from 18.3 per cent to 17.8 per cent.

Offshore mutual funds form an important component of total foreign portfolio investment, apart from other large FPIs such as offshore insurance companies, hedge funds and sovereign wealth funds.

During the March quarter, FPIs were net sellers in Indian equities to the tune of USD 14.59 billion as compared to the net inflow of USD 5.12 billion in the previous quarter.

On a month-on-month basis, foreign investors offloaded old net assets worth USD 4.46 billion in January, USD 4.74 billion in February and USD 5.38 billion in March.

There was an exodus of foreign funds from Indian equity markets of epic proportion during the quarter ended March. The caution displayed among foreign investors was evident from the start of the quarter, which intensified as it progressed under the influence of worrying trends in both global and domestic markets.

Explaining the sell-off, the report mentioned that weakness in the global markets triggered a risk-off approach in equities. The sentiments were dented from the start of the quarter with the US Fed signaling that it would start hiking interest rates soon and shrink its bond holdings. With that information, FPIs chose to move out of the markets that had rich valuations to invest in the ones offering relatively attractive valuation and better risk/reward.

On the domestic front, the pro-growth budget and normalisation in the third wave of the pandemic in India did offer some relief and managed to check the exodus of funds to some extent in the interim. However, the scenario started to turn grim as tension started to escalate between Russia and Ukraine, the report noted.

Rising crude prices and surging inflation in the US also continued to worry foreign investors as it was paving the way for the rate hike by the US Fed. These concerns ensured that foreign investors continue to offload their investments in the Indian equity markets on a rather regular basis, it added.

However, FPIs went on a selling spree after Russia declared war on Ukraine and in March, the US Fed hiked rates for the first time since 2018 by a quarter percentage point and at the same time it indicated a series of more rate hikes this year. This opened the floodgates of outflows of foreign money from the Indian equity markets.

So far this calendar year, FPIs have sold net assets to the tune of over USD 18 billion from Indian equity markets.

Going ahead, foreign flows into Indian equities could continue to be under stress as there is nothing much to cheer up foreign investors and coax them to invest in Indian equities as of now. The ground reality remains grim, the report pointed out.

“Besides the rate hikes by both RBI (Reserve Bank of India) and the US Fed, uncertainty surrounding the Russia-Ukraine war, high domestic inflation numbers, volatile crude prices, and weak quarterly results does not paint an incredibly positive picture. The recent rate hikes could also slow the pace of economic growth, which is also a concern,” it noted.

Adding to the worry is the resurgence of COVID-19 cases in China and in some other parts of the world. In such a scenario, FPIs typically turn risk-averse and adopt a wait-and-see approach until greater clarity emerges, it added.

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