DII rescues record $26 billion FPI exit

A record 2,015 billion rupees ($26 billion) has been outflowed by foreign portfolio investors (FPIs) since October 2021, making it the biggest sell-off in the history of Indian capital markets. A major crash in the market was averted as domestic institutional investors (DII) led by mutual funds poured in Rs 240,250 crore ($31 billion) during the period.

Mutual funds have invested Rs 155,000 crore in the market since October, with investors pouring more than Rs 10,000 crore per month through the MF’s Systematic Investment Program (SIP).

The outflows caused by the ongoing sell-off in FPIs over the past 7 1/2 months have even surpassed the previous record sell-off in FPIs, when Rs 116,250 crore ($15 billion at current exchange rates) was withdrawn during the global financial crisis January 2008 to March 2009 crisis of the month.

According to the data compiled Indian Express, when the coronavirus pandemic hit the country in March 2020, FPIs withdrew more than 85,250 crore rupees ($11 billion) from India. However, when the economy recovered from the impact of the Covid pandemic, the market then pulled back and recovered.

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“India’s relatively high valuation, rising U.S. bond yields, dollar appreciation and fears of a U.S. recession triggered by aggressive tightening are factors behind the FPI exit,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

When the global economy took a hit, central banks around the world slashed interest rates and announced accommodative monetary policies. While this helped the economy recover and led to increased consumption, excess liquidity in the financial system led to one big concern: inflation.

Central banks are tightening monetary policy and raising interest rates as inflation rises to new levels in major economies such as the United States and the euro zone.In India, inflation surged to an eight-year high of 7.79% in April, prompting the RBI to raise interest rates repo rate 40 basis points to 4.40%. In fact, inflation in several economies has risen to the highest levels in decades. If US CPI inflation was around 8.3 in April, UK CPI inflation surged to 7.0% in March, the highest level in the data series. Overall, annual inflation in the euro zone hit a new high of 7.5% in April, driven mainly by energy, followed by food, alcohol and tobacco, a Reserve Bank of India report said. Even among the BRICS nations, inflation in China rose to a five-month high of 2.1 percent in April as supply pressures worsened due to widespread lockdowns.

This has led to a sharp sell-off in global financial markets since April. In fact, the Sensex is down 10.5% since closing at 60,611 on April 4.If the concern at the time was the pace of exit from the major central banks, especially the U.S. Fedthere are concerns that inflation and higher interest rates could have an impact on global growth.

Recently, there have been signs of a sell-off drying up in FPI and DII, with retail buying emerging as a powerful counter-attack to FPI selling at higher levels, which may continue to sell off. If the global market stabilizes, FPI sales will be easily absorbed by DII plus retail purchases,” he said.

According to data reported by NSE500 companies, ownership of FPIs in Indian equities has fallen by around two percentage points to 19.5% in the past two years as of March 2022, following the FPI sell-off. The rupee has also fallen over the past year due to rising inflation, rising interest rates, the exit of foreign investors and a slump in markets.

“FPI holdings fell below the Covid low of 19.5% due to continued outflows,” Bank of America (BoFA) Securities said in a note.