Foreign portfolio investors accelerate selling as oil prices shoot up

Further selling could test domestic investors' nerves: Analysts

Foreign portfolio investors (FPIs) have accelerated sales of stocks in the domestic market amid a surge in international oil prices and depreciation of the rupee. In just the past two trading sessions they have pulled out close to $2 billion (about Rs 15,000 crore).

The year-to-date selling from domestic stocks by FPIs has now touched nearly Rs 1 trillion.

The average daily sales this year is about Rs 2,200 crore. However, since the start of the Russia-Ukraine war, it has averaged about Rs 4,500 crore.

Experts say the current bout of selling by foreign funds is among the worst the domestic markets have ever seen. The sharp selloff comes on the back of investments of over Rs 2 trillion in domestic stocks after the outbreak of the Covid-19 pandemic.

However, the selloff had begun before the Russian invasion of Ukraine. FPIs had hit the sell button immediately after the US Federal Reserve (US Fed) announced the reversal of its post-pandemic easy monetary policy, indicating that it would increase interest rates. Oil prices hitting 14-year a high in the aftermath of the war have further dampened sentiment towards India, which is a large importer of the commodity.

Oil prices are expected to rise further, while the rupee — which hit an all-time low on Monday — is expected to decline further against the US dollar.

“As long as uncertainty persists, FPIs will take risk off the table not just in India but from anywhere they feel the need. Risk managers might be saying we don’t know what the next stage is and we should take money off the table,” said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

The sharp selling by FPIs has weighed on the performance of the domestic market. On a year-to-date basis, the Sensex has declined 9.3 per cent. From the peak it touched in October 2021, the index has fallen 14.4 per cent. The Bank Nifty index, meanwhile, has declined over 20 per cent from its peak. The financial sector is the biggest overweight for FPIs with over a third of their equity assets deployed towards banking and non-banking financial company stocks.

Market experts say the fall in the market would have been sharper if not for buying by domestic institutional investors, particularly mutual funds (MFs). So far this year, MFs have pumped over Rs 50,000 crore into domestic stocks. Over half of these flows have been in the past two weeks.

“The rising domestic bid on stocks since 2014 also means that FPI selling is now offset, unlike in the past,” said Morgan Stanley in a note last week.

However, market observers say domestic investors have not seen a sharp and sustained downfall since March 2020. If the recent correction extends further, it could test the patience of domestic investors, they add.