India focused offshore funds, ETFs log $435-mn outflow in Q3: Report

India-focused offshore funds and exchange-traded funds (ETFs) witnessed a net outflow of USD 435 million in three months ended December 2021, making it the 15th consecutive quarter of withdrawal, according to a Morningstar report released on Wednesday.

This was way higher than the net outflows of USD 95 million registered during the quarter ended September 2021.

The higher outflow during the quarter under review could be attributed to "enhanced concerns on the global and domestic fronts and driven by the US Fed's hawkish statement that it might raise interest rates much earlier than assumed".

India-focused offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity market.

Through the calendar year 2021, India-focused offshore funds and ETF category experienced net outflows to the tune of USD 2.45 billion, which was sharply lower than the net outflow of USD 9.26 billion recorded in 2020.

During the three months ended December 2021, India-focused offshore fund segment witnessed a net outflow of USD 638 million compared with the net inflow of USD 14 million in the preceding quarter. In the entire 2021, the segment had a net outflow of USD 3.47 billion.

On the contrary, India-focused offshore ETF saw net inflows of USD 203 million during the quarter under review, compared with the net outflow of USD 108 million in the preceding three months. Through 2021, the segment received a net inflow of USD 1.01 billion.

Flows into offshore funds are generally considered to be long-term in nature, whereas flows into offshore ETFs indicate predominantly short-term investment.

The offshore funds and ETFs category have been witnessing consistent net outflows since February 2018. The intensity reached its peak in the March 2020 quarter, as almost USD 5 billion left its coffers. This was the highest quarterly net outflows that the category had ever witnessed.

The intensity of net outflows did show signs of moderation during the June, September, and December quarters of 2020 as well as during the quarter ended March 2021.

However, with the second wave of the COVID-19 pandemic hitting Indian shores, the pace of net outflows again shot up, and rather sharply, in the India-focused offshore funds and ETFs category during the ended June 2021, when it lost net assets worth USD 1.55 billion.

But, with the scenario improving, net outflows from the category reduced sharply during the quarter ended September 2021 and stood at USD 95 million. The fall in the quantum of net outflows was a result of positive sentiment on expectation of improving the macroeconomic environment and positive growth outlook.

According to the report, future trend of the flows in the India-focused offshore fund and ETF category will revolve around how it fares against comparable economies on the growth prospects from a long-term perspective.

"Some of the factors will be closely watched by foreign investors, such as -- how the scenario unfolds on global inflation and the economic growth front, and subsequently, the US Fed's decision to hike interest rates," the report said.

Also, on the domestic front, the build-up of the inflationary pressure is evident, which has raised concerns that a rate hike could be on the horizon. In the current environment, the investors will focus on how the country will traverse through the path of economic growth, it added.

In addition, the assets of India-focused offshore funds and ETFs declined during the quarter under review on correction in the Indian equity markets in the large- and mid-cap segments, coupled with net outflows.

Through the quarter ended December 2021, their asset base fell two per cent to USD 50.4 billion, compared with USD 51.6 billion recorded in the preceding three months.

The fall in assets during the December 2021 quarter was after six consecutive quarters of increase in the asset size of India-focused offshore funds and ETF category. The size of the category was USD 42.9 billion at the end of December 2020.