Aggressive rate hike by the US Federal Reserve, coupled with elevated inflation and high valuation of equities continued to keep foreign investors at bay from the Indian stock market as they pulled out Rs 31,430 crore in this month so far.
With this, net outflow by Foreign Portfolio Investors (FPIs) from equities reached Rs 1.98 lakh crore so far in 2022, data with depositories showed.
Going forward, FPI flows to remain volatile in the emerging markets on account of rising geopolitical risk, rising inflation, tightening of monetary policy by central banks, among others, Shrikant Chouhan, Head - Equity Research (Retail), Kotak Securities, said.
According to the data, foreign investors withdrew a net amount of Rs 31,430 crore from equities in the month of June (till 17th).
The massive selling by FPIs continued in June too as they have been incessantly withdrawing money from Indian equities since October 2021.
Shrikant attributed latest selling to rising inflation, tight monetary policy by global central banks and elevated crude oil prices.
Global investors are reacting to increased risks of a global recession as the US Federal Reserve was forced to raise interest rates by 75 basis points due to persistently elevated inflation. Moreover, it also indicated to continue its aggressive stance to contain stubbornly high inflation.
"Strengthening of the dollar and rising bond yields in US are the major triggers for FPI selling. Since the Fed and other central banks like Bank of England and Swiss central bank have raised rates, there is synchronised rate hikes globally, with rising yields. Money is moving from equity to bonds," V K Vijayakumar, Cheif Investment Strategist at Geojit Financial Services, said.
Given this scenario of uncertainty where bonds offer the safety of capital and better yields it is obvious that there will be a flight of capital to safety. The US markets saw the worst weekly drop since March 2020, the peak of pandemic, Vijay Singhania, Chairman, TradeSmart, said.
On the domestic side as well, inflation has been a cause for concern, and to tame that, RBI has also been increasing rates.
"The aggressive Fed rate hike would most likely push the RBI to hike rates further over the next two or three quarters, which would have a direct bearing on GDP growth and market movement," Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said.
Moreover, the geopolitical tension due to the war between Russia and Ukraine does not show signs of a resolution. Crude also continues to be at elevated levels. These factors have turned foreign investors risk averse and hence they have been staying away from investing in Indian equities, he added.
In addition to equities, FPIs withdrew a net amount of about Rs 2,503 crore from the debt market during the period under review. They have been continuously withdrawing money from the debt side since February.
From the risk reward perspective and with interest rates rising in the US, Indian debt may not be an attractive investment option for foreign investors, Srivastava said.
Apart from India, FPIs have been selling heavily in other emerging markets like Taiwan, South Korea, Phillipines and Thailand.