What is the reason for selling by foreign portfolio investors? Does this affect the ongoing economic recovery?
What is the reason for selling by foreign portfolio investors? Does this affect the ongoing economic recovery?
the story So Far: Foreign Portfolio Investors (FPIs) are selling in India. Figures around ₹44,000 crore The selloff formed the highest monthly volume since March 2020 when India announced a nationwide lockdown. Last month was also the eighth consecutive month when FPIs had sold net worth of their assets – that is, sold more than they had bought. Their sell-off actions have led to a significant fall in the benchmark indices resulting in a fall in the market capitalization of the companies.
What are FPIs?
Foreign portfolio investors are those who invest in markets outside their home turf. Their investments generally include equities, bonds and mutual funds. They are generally not active shareholders and exercise no control over the companies whose shares they hold. The passive nature of their investments also allows them to enter or exit stocks voluntarily and easily.
What factors drive FPI?
The promise of attractive returns on the back of economic growth attracts investors including FPIs to the country’s markets. For example, according to data from National Securities Depositories Limited (NDSL), FPIs brought in around ₹3,682 crore in 2002. This increased to ₹1.79 lakh crore in 2010. It is concerned with the concurrent expansion of economic output over that period. , despite the 2008 global financial crisis, which saw a sell-off of FPIs in the country over that time-frame. The year 2017 saw FPI inflows exceeding ₹2 lakh crore.
Similarly, FPIs pulled out Rs 1.18 lakh crore in March 2020 alone – the month when India announced a nationwide lockdown, raising concerns about economic growth. In tandem, the benchmark stock index Sensex fell from 42,270 in February 2020 to 25,630 in March 2020.
FPIs also show a willingness to invest in bonds when there is a favorable difference between real interest rates in the country and other markets, but more specifically, the U.S., compared to the world’s largest economy.
Why are FPIs selling Indian holdings?
FPIs sold assets worth Rs 44,000 crore in May 2022. This is the second biggest sale in a month since 1993, after March 2020.
After the pandemic, the recovery in the Indian economy has been uneven. The second wave of the COVID-19 pandemic devastated lives and livelihoods in 2021. The economy faltered again when a third, though less severe, wave saw the spread of the Omicron variant earlier this year. Add to this the slowdown in demand as the pandemic subsides in economies around the world. The pace of recovery stunned the suppliers, contributing to the shortfall on the supply side.
While the industry was grappling with this challenge, Russia launched an attack on Ukraine. Supplies of sunflower oil and wheat from these two countries were affected, leading to an increase in global prices of these crops. As worldwide supply tightened in general, commodity prices also rose and overall inflation accelerated. India saw a sharp pick-up in price growth, which remained above the Reserve Bank’s upper comfort level of 6% for four months, touching 7.8% in April. Industrial production has also seen a bumpy ride without giving confidence of a full and eventual recovery from the pandemic. Consumption expenditure in the subcontinent also remains weak.
With each of these factors contributing to the decline in confidence of strong economic performance, foreign portfolio investors have been reducing market exposure in these past months.
Add to the mix the US Federal Reserve to raise the benchmark interest rate starting in March this year. The key rate rose from 0-0.25% in March to 0.75-1% in May and is expected to rise by 50 basis points in each of the next two Fed meetings.
When the gap between interest rates in the US and other markets narrows, and if such an event coincides with a strengthening of the dollar, investors’ ability to generate healthy returns is affected. For this, returns are measured not only by the increase in the value of assets, but also by changes in the exchange rate. If the dollar strengthens against the rupee, an investor is able to realize less dollars for liquidation of a fixed amount of rupee assets. In addition, if inflation picks up in the foreign market where the investor has kept the funds, the real returns are further affected.
They then tend to exit assets they see as ‘risky’, such as emerging markets such as India, Brazil or South Africa.
What is the impact of selling of FPIs?
When FPIs sell their holdings, and repatriate the money to their domestic markets, the local currency takes a hit. After all, they sell money in exchange for the currency of their home market. As the supply of rupee in the market increases, its price decreases. In this example, the rupee is seeing an all-time low recently. About a year ago, it was trading at a US dollar in the region of 73; It is now flirting with level 78. With a weaker rupee, we have to spend more money to import goods of the same unit. The biggest impact is on the cost of importing our crude oil which contributes to 85% of our oil needs.