FPI outflows exceed 2008 global financial crisis as Fed policy move nears

Selling accelerated after Russia attacked Ukraine in February and caused a spike in global commodity prices

The pace at which foreign portfolio investors (FPIs) are selling holdings is one of the worst the Indian market has seen. An analysis by brokerage ICICI Securities shows the trailing 12-month (TTM) selling tally of FPIs of $36 billion is higher than $28 billion recorded during the 2008 global financial crisis.

Overseas investors have stepped up their selling since October, expecting the US Federal Reserve will make a hawkish pivot due to inflation in the US. The selling accelerated after Russia attacked Ukraine on February 24 and caused a spike in global commodity prices, particularly oil. Since October, FPIs have yanked out nearly $20 billion from domestic stocks, while net-selling for the past one-month is about $9 billion.

However, despite the sharp selling, domestic markets have been relatively resilient. From their peak in October, the benchmark Sensex came off as much as 15 per cent. It currently trades less than 10 per cent off the October high of 61,766.

The impact of FPI selling during the 2008 crisis was worse, causing the benchmark Sensex to crash nearly 70 per cent from highs of around 20,800 in January 2008 to 8,500 in October 2008.

The relatively shallow correction is thanks to sharp inflows from domestic institutional investors (DIIs), who have pumped in $28 billion on a trailing 12-month basis.

As a result, the TTM net institutional outflows at $8.2 billion (FPI + DII flows) is currently lower than the 2008 crisis peak outflow of $8.6 billion, says ICICI Securities. Also, if one adds FPI investment into the primary market (mainly IPOs), TTM outflows drop to $18.3 billion.

The sharp inflows from DIIs are thanks to sustained inflows into mutual funds (MFs), particularly the systematic investment plan (SIP) route. On a monthly basis, SIPs are seeing inflows in excess of Rs 10,000 crore.

“We are witnessing consistent buying by domestic investors in the face of unprecedented selling by FPIs during rare and extreme fear-inducing events seen over the past few years (covid pandemic and global brinkmanship due to the Russia-Ukraine conflict). This is a clear positive surprise and heralds the structural deepening of domestic savings into equities in India," said Vinod Karki, equity strategist at ICICI Securities.

"Such behaviour of aggressive buying during declining stock prices by domestic investors should result in improved long-term outcomes for their portfolios vs buying in a high-optimism phase of the market, and thereby setting off a virtuous cycle. However, the corollary to the foregoing is that expectations of finding huge bargains in stock prices seen in previous bouts of FPI selling will be belied going ahead,” said Karki.