Snapping their six-month buying spree, foreign investors turned net sellers in April and pulled out Rs 9,659 crore from Indian equities, spooked by the intense second wave of coronavirus and its fallout on the economy.
If the fears of COVID-19 increases among foreign investors, we can witness further redemptions, which can result in some more volatility in the market, Harshad Chetanwala, co-founder Mywealthgrowth.com, said.
According to data available with depositories, foreign portfolio investors (FPIs) withdrew a net sum of Rs 9,659 crore from Indian equity markets in April.
This was the first net withdrawal since September 2020, when they had pulled out a net of Rs 7,782 crore from equities.
Prior to the last month's outflow, FPIs invested over Rs 1.97 lakh crore in equities between October 2020 and March 2021. This included a net investment of Rs 55,741 crore in the first three months of this year.
"There has been generally a slowdown in foreign inflows into emerging markets. Particularly in the case of India, the intense second wave of coronavirus and its fallout on the economy has led to some selling pressure by foreign institutions," Gaurav Dua, SVP, Head - Capital Market Strategy, Sharekhan by BNP Paribas, said.
Chetanwala attributed the selling by FPIs to their nervousness about the second wave of the pandemic.
Brijesh Bhatia, Senior Research Analyst, Equitymaster, said India is struggling with the lockdowns due to the rise in COVID-19 cases.
"We have witnessed the lockdown impact on the economy in 2020 when GDP growth rate fell from 1.1 per cent in Q1 2020 to -25.90 per cent in Q2 2020. Uncertainty over the quick recovery of economy hinders, which is the major reason for money flowing out from India," he added.
The selling by FPIs is a near-term phenomenon and unlikely to pose a big risk as fundamentals of Indian equities continue to remain sound, Binod Modi, head strategy at Reliance Securities, said.
He, further, said any visible reversal in COVID-19 cases is likely to bring back FPIs flow into equities in the coming months.
Apart from equity, FPIs have offloaded debt securities worth a net of Rs 118 crore last month.
There has been no respite for the debt markets as FPIs have been a net seller in the segment since January.
"Since the COVID-19 pandemic has spread across various countries and regions, foreign investors have turned risk-averse. Consequently, they shifted their focus towards safer investment options or safe havens such as gold or US dollar, as against investing in fixed income securities of emerging markets like India, where risks are relatively higher," Himanshu Srivastava, Senior Analyst-Manager Research, at Morningstar India, said.
So far this year, FPIs have invested a net sum of Rs 46,082 crore in equities, however, they pulled out a net amount of Rs 15,616 crore from debt securities.
Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, said, "We are still some time away in terms of recording peak cases, which means there could be more negative news flows on the COVID front".
Also, the steep rise in copper and steel price to near-decade high will be a cause of concern for the entire manufacturing sector, Oza added.
Going forward, Srivastava said that coronavirus, its spread and likely impact on the economy would continue to be watched closely by the FPIs while making investment decisions into India. In line with that, they will gradually start focusing on the domestic economic indicators and how the country manages its deficits going ahead. "It remains to be seen how long India takes to recover from this second wave but we expect the FPIs investments to become positive soon after the second wave shows signs of receding," Harsh Jain, co-founder and COO Groww, said.
