May sees worst FPI sell-off in over two years at Rs 44,000 crore

Foreign portfolio investors (FPIs) continued their selling spree in May, pulling out nearly Rs 44,000 crore ($5.7 billion) from domestic markets. This is the worst sell-off the markets have seen since March 2020 when foreign investors dumped shares worth Rs 58,632 crore ($7.9 billion) due to the scare triggered by Covid-19

The sell-off in May is also the second-highest monthly outflows recorded in the domestic market since 1993.

The latest sell-off by FPIs is triggered by worries around stagflation as the US Federal Reserve looks to aggressively tighten its monetary policy even as supply disruptions caused by the Russia-Ukraine war and lockdowns in China threaten to keep prices of key commodities high.

“The sustained FPI selling is largely because of the prolonged war in Ukraine and hike in interest rates by the Fed. Immediately after the March 2020 sell-off, FPIs had bought a lot, and they are sitting on profits. Monetary tightening and interest rate hikes have been indicated for the last several months. Since then, FPIs have been sellers. And domestic investors have been compensating for the outflow,” said UR Bhat, co-founder, Alphaniti Fintech.

Notably, five of the 10 months that saw the worst FPI outflows have come in the past eight months. Overseas investors have hit the exit button since October ahead of unwinding of the post-pandemic stimulus measures. In May, FPIs were net-sellers for the eighth straight month, pulling out a staggering Rs 2 trillion ($27 billion) during this period.

While on an absolute basis, the recent selling appears sharp, it is lower when compared to the country’s total market capitalisation (m-cap)—and thus the capacity to absorb the FPI sell-off.

For instance, the selling in March 2020 was a bigger shock as India’s average m-cap was Rs 125 trillion compared to Rs 253 trillion in May 2022. Similarly, the $4.4 billion pull out during the global financial crisis in January 2008 was also hard to digest as India’s m-cap was Rs 67 trillion.
 

“A $3-4-billion sale can be matched now, unlike in the past. And that is a sign of a mature market. The pace of interest rate hikes and Fed balance sheet shrinking is known. As these factors get priced in, we might see some FPI selling ebb,” added Bhat.

Having said that, the sharp bouts of FPI selling since October have led to heightened volatility in the markets.

“Volatility is still high as interest rates are still rising globally. The Fed is yet to reduce its balance sheet. So there could be some problem down there that could be swept under the carpet in the next two months. Europe and the UK will be in recession. The US will be staring at it,” said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

The FPI selling from the domestic market in recent months is higher than emerging market (EM) peers such as Indonesia. Experts say this is due to India’s sharp outperformance since March 2020 and better prospects and valuations in other EMs.

However, given India’s long-term prospects, FPI outflows could reverse after the global headwinds reverse, they add.

“Once the Fed stops and the risk-on trade comes back, India will stand out as one of the leading countries given its high GDP growth. That's when we are going to get the FPI flows back,” said Holland.