FPI outflow tops Rs 2 lakh crore, over double of 2018 high

(This story originally appeared in on Jun 16, 2022)

Mumbai: Net foreign fund outflow from India in 2022 has crossed the Rs 2-lakh-crore mark, the biggest annual figure ever and more than double the previous high of Rs 80,917 crore recorded in 2018. Of the total, over 90%, or about Rs 1.9 lakh crore, was because of selling by foreign portfolio investors (FPIs) in the stock market, data from showed.

Galloping inflation, rising current account deficit, a weakening currency and the decision by the US Fed to raise rates in the world’s largest economy at a very fast clip have compelled foreign fund managers to take money off risky emerging market assets including from India, analysts and brokers said. On Wednesday, the rupee closed 7 paise down at a record low of 78.07 against the dollar.

June is the ninth consecutive month that FPIs have been net sellers in India, taking the total to nearly Rs 2.5 lakh crore during this period. So far this month, in just 15 days, FPIs have net sold stocks worth nearly Rs 25,000 crore, official data showed. On Wednesday too, FPIs were net sellers in the market to the tune of Rs 3,531 crore. This data will be incorporated in the figures that will be reported on Thursday.

According to a leading debt fund manager, the FPI outflow could continue for a few more months, at least till the time there is clarity about how far the US Fed will move to tighten liquidity in the US.

To tame inflation, US Fed chairman Jerome Powell has indicated to raise rates very quickly and aggressively. The Fed has also said that it would reduce its balance sheet size at the rate of $95 billion per month. Since the Covid pandemic started in early 2020, the US central bank had been buying bonds from the market and in turn infusing funds into the system. Now given that retail inflation in the US is at a 41-year high, the Fed, along with raising rates, has also stopped buying bonds. In addition, starting this month, it has started selling bonds it’s already holding.

“The world will, for the first time, have to face Fed’s active balance sheet reduction programme. It’s a completely uncharted territory and no one knows how this will pan out for the global markets,” said the fund manager. “Since rate hikes in the US and the rallying government yields have made funds costly, along with rupee’s depreciation, FPI fund managers are taking money out of India,” the fund manager said.

There could be a silver lining also. Prashant Jain of HDFC MF, who manages over Rs 90,000 crore worth of investors’ money across three funds, on Tuesday told investors, fund distributors and others that he feels the current strong selling by FPIs could slow down in the next six months or so, considering that these funds have already sold large quantities of stocks in India. “Selling by FIIs should abate in next 1-2 quarters or earlier. The next 3-6 months could see uncertainty, but after that, some risks will be clarified,” Jain said over a web-conference during MF’s mid-year review of Indian economy and markets.