 "Foreign inflows hit 2008 lows")
The year 2016 is set to go down as the only year after 2008 when overseas investors have taken money out of Indian markets. Foreign portfolio investors (FPIs) have pulled out $3 billion from debt and equity markets put together so far this year. Since 1999, when FPIs started investing in the domestic debt market, overseas investors have been investing between $750 million and $42 billion each year, with the exception of 2008.
In the aftermath of the global financial crisis of 2008, FPIs had pulled out around $9.5 billion from the Indian market. In 2008, the sell-off was in the equity segment, while this year, a $6.5-billion pull-out from the debt market is weighing on the total FPI investment tally. So far this year, FPIs remain net buyers to the tune of $3.6 billion in the equity segment.
Experts say rising bond yields in the US, coupled with its improving economic outlook, has triggered the sharp outflows from the domestic debt market.
“The trend clearly shows investors are shifting back to dollar-based securities away from emerging markets. While the US bond yields have been increasing, in India we are set to witness a low interest rate regime. Overseas funds were until now banking on countries like India for its growth potential, but the scenario has changed. The US economy is expected to grow at a healthy pace while India, along with few other emerging markets, could witness a slowdown,” said Dharmesh Mehta, managing director, Axis Capital.
Incidentally, this is only the second time when Indian debt markets have witnessed selling from foreign funds - the other instance being in 2013 when FPIs sold debt securities worth $8 billion. The 2013 sell-off was on account of the end of quantitative easing (QE), which essentially meant the US Fed stopped buying bonds to provide stimulus to the markets.
Similar to this time, the yields on the 10-year US Treasury notes had risen from below two per cent to 2.4 per cent. Increase in the US bond yields reduces the attractiveness of Indian debt, prompting FPIs to sell. This time around, the increase in US yields has been accompanied by a sharp fall in the yields on benchmark domestic 10-year government security following demonetisation.
Most FPIs, barring sovereign wealth funds, have drastically reduced their holdings of domestic sovereign bonds. Currently, FPIs’ G-Secs utilisation level has dropped to a record 74 per cent of the investment limit in G-Secs. In comparison, at the start of April 2016, they had utilised 99 per cent of the available limit.
On the equity front, there was enough buoyancy in the markets in terms of FPI buying during the first nine months of 2016. Despite a few early bouts of selling during the months of February and March, FPIs’ inflows had touched the $8-billion mark in August. During the same period, benchmark indices were trading just one-two per cent lower than their lifetime highs.
However, markets witnessed a significant correction after November 8, when the central government announced its plans to scrap high-value currency notes. Since then, FPIs have pulled out more than $3 billion from the Indian markets.
Market participants say, the pain in terms of FPI flows would continue for the next two-three quarters as markets would remain volatile due to the impact of demonetisation and less-than-expected corporate earnings.
“Higher yields in developed markets may further pressure the multiples of high price to earnings (P/E) stocks despite the recent correction in valuations. The demonetisation measure of the Indian government will affect demand in some sectors,” said Kotak Institutional Equities in a note to investors.
