NEW DELHI: A consistent phenomenon in the domestic equity markets over the last eight months has been sales by foreign portfolio investors amid surging global commodity prices and the Federal Reserve’s aggressive rate hike plan to tame inflation in the US.
So far in 2022, Foreign Portfolio Investors (FPI) have net sold a massive Rs 1.81 lakh crore worth of Indian stocks. The total tally of sales since October 2021 has crossed the Rs 2 lakh crore mark, standing at Rs 2.2 lakh crore.
Higher interest rates in the world’s largest economy and a consequently stronger US dollar diminish the appeal of assets in riskier emerging markets such as India. The global strength of the dollar has led to the rupee weakening around 4.5 per cent against the greenback so far in 2022. A weaker rupee erodes FPIs’ returns from Indian assets.
The huge increase in global commodity prices since Russia’s invasion of Ukraine in late February has also soured appetite for domestic stocks as India faces massive upside risks to inflation, a wider import bill and downside risks to growth because of the global developments.
While the unfavourable global scenario persists,
Services’ Head of Research Vinod Nair said to ET Markets that while FPI selling could continue in the near term, he expects a moderation in the sales in “short to medium-term”.
“This is because a large part of the changeover like economic slowdown, hawkish monetary policy, supply constraints and high inflation are factored in the market prices, which were consolidating over the last 7 months,” Nair said.
BSE Sensex and NSE Nifty50 have lost 13 per cent and 12 per cent, respectively, from the lifetime highs they touched in October 2021 – incidentally, the month in which the FPIs started selling.
The correction in headline indices has improved the outlook on valuations, analysts said.
Market correction and profit expansion have resulted in valuations receding to reasonable levels based on the valuation methodologies,”
wrote in a note earlier this week.
“On an ex-post basis, forward P/E for the NIFTY50 index at around 18x is at its lowest level since CY16 (excluding the brief covid period), while P/B at 3x is at its long-term average level and ‘market cap to GDP’ is marginally above the 100 per cent mark,” the brokerage said.
In the next couple of trading days, however, FII outflows are likely to continue as a higher-than-expected inflation print in the US has strengthened the case for the Federal Reserve to raise interest rates at an aggressive clip.
Data released after Indian trading hours on Friday showed that US inflation rose to a fresh 40-year high of 8.6 per cent in May.
After hiking rates by a total of 75 bps so far in 2022, the Fed is seen lifting rates by 50 bps each in June and July. The Fed will give details in the next policy statement on June 15.
Till date, the monthly FPI net flows are negative in anticipation of a hawkish FOMC meeting. This selling can reverse if current and future policy measures announced are in-line with the market view and vice versa,” Nair said.
“…the future inflation will depend on the developments of war and Chinese supply, which may relax in the short to medium-term,” he added.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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