Indian equities had a tumultuous ride last week after the US Federal Reserve indicated that it could keep interest rates elevated for longer than expected before. The Fed projections pushed the US Treasury yields to a 16-year peak and lifted the dollar index. In response, foreign portfolio investors (FPIs) have turned sellers in Indian equities in September so far, after months of investing heavily. The ongoing India-Canada tiff, rising crude oil prices, and erratic rainfall have also dampened investors’ sentiments. Market analysts believe that uncertain global cues and the sharp surge in US bond yields will keep sentiments on the edge in the near term.
Flight of safety
Until August, FPIs had remained net buyers of Indian equities for six months. But this month so far, they have offloaded shares worth over ₹10,000 crore as US bonds, with their rising yields, have become a more lucrative option. Between April and August, foreign investors had pumped money in segments such as auto, construction, and consumer durables. But with the sudden withdrawal, auto, metals and mining, and fast-moving consumer goods segments have been the quickest to fall out of favour.
Peers under pressure
But FPIs have been selling across emerging markets (EMs), and analysts expect this to continue for some more time. What’s going well for India is that despite the risk-off selling spree, flows into the country have remained healthy for the year so far, cumulatively, relative to peer markets. Domestic institutional investors are standing tall with sustained buying, as domestic mutual fund inflows have stayed robust.
Destination India
Notwithstanding the recent pangs, over 100 new foreign investors entered the Indian stock markets since March. Over 400 new FPIs had joined the capital markets last fiscal year—with the highest number coming from the US—compared to 633 in 2021-22. In terms of the equity assets under custody, Canada was at the ninth spot as of August, with a 2.8% share. The ongoing tensions between India and Canada are unlikely to impact these flows. Nearly 84% of the overseas investors’ equity assets under custody are from 10 countries, with the US having a 42% share.
Lost holdings?
Meanwhile, FPI ownership in the top 500 listed firms had risen to a seven-quarter high in the April-June period in value terms. With the reversal of flows, shareholding of foreign investors in these companies would most likely have seen some decline in the current quarter. Data for this will get updated only by the end of next month.
What lies ahead?
India is better placed compared to its other emerging market peers, said Mukesh Kochar, national head – wealth, AUM Capital. “Other EMs like China, Taiwan etc. are suffering from their own issues and that might be a gain for India,” he said. “By and large, we believe that FPIs cannot ignore India in their allocations. There may be temporary outflow due to temporary issues but India will continue to attract FPI money on a long-term basis.”