FPI outflow shoots past Rs 1 trn in 2022 amid Ukraine, inflation concerns

Overseas investors have pulled out a net Rs 1,14,855.97 crore from the Indian markets in the current year so far, amid heightened geopolitical tensions and inflation concerns.

Foreign portfolio investors have sold domestic equities worth Rs 48,261.65 crore so far this month, taking the year-to-date tally this year to a massive Rs 1,14,855.97 crore, according to depositories data.

The exodus of foreign investors was largely owing to inflationary pressures and deepening global macroeconomic conditions following the Russia-Ukraine war, experts said.

This is for the sixth straight month that foreign institutional investors have offloaded their holdings on a net basis in the Indian equity market.

Foreign portfolio investors (FPIs) fear that India would be impacted more by commodity price hikes, particularly in crude oil, since India is a major importer.

"While Russia- Ukraine war has limited the direct impact on the Indian economy, given our lower dependence of imports from these countries, higher commodities inflation poses a key risk both in terms of macro parameters such as the balance of payments and inflation as well as corporate earnings estimates on account of higher input costs," said Shibani Kurian, Senior EVP & Head- Equity Research, Kotak Mahindra Asset Management Company.

Kurian further added that India is a net importer of crude oil and it is estimated that every 10 per cent increase in crude oil prices impacts the current account deficit by around 30 bps and CPI inflation by around 40 bps and GDP by around 20 bps, all else remaining constant.

"However, unlike the past, this time around there are a few offsets from a domestic standpoint, which includes high forex reserves, strong FDI flows and improvement in export growth," Kurian noted.

As per depositories data, foreign investors pulled out Rs 28,526.30 crore from Indian equities in January, Rs 38,068.02 crore in February and Rs 48,261.65 crore in March so far.

"The Indian equity markets continue to be in a grind, influenced by and reacting to incremental news flow on the global front, especially related to the geopolitical situation and Fed rhetoric. The two key challenges and monitorables for the markets in the near term are the persistent inflationary pressures and the rising bond yields," said Milind Muchhala, Executive Director, Julius Baer.

While the inflationary pressures have been building up over the past few months, the geopolitical situation has worsened the situation, as Ukraine and Russia are large players in the energy and several commodities, and the prices of several of these have spiked up since the beginning of the crisis, Muchhala added.

"A prolonged geopolitical situation and elevated prices will gradually start weighing on demand and profitability and can lead to a cut in growth and earnings estimates. Also, the recent rise in bond yields can have implications for flows and equity valuations," Muchhala said.