After pumping in $9 bn, FPIs in retreat mode on valuation concerns

Since October, overseas investors have yanked out close to $2.6 bn

After pumping close to $9 billion into domestic stocks, foreign portfolio investors (FPIs) are in retreat mode. India has been one of the best-performing major markets globally this year. The withdrawal began in early October, quickly gathered pace, and plateaued in recent trading sessions. The year-to-date investment rally of FPIs is now down to below $6.2 billion.

Profit-taking, amid concerns about expensive valuations, policy normalisation, and large initial public offerings (IPOs), is a key reason behind the recent FPI sell-off.

“India has done exceptionally well vis-à-vis its emerging market (EM) peers. There is a bit of profit-taking more than anything else. We might see some more selling and volatility as the US Federal Reserve (Fed) tapering nears. The risk-reward for India is somewhat skewed towards the risk side,” said Andrew Holland, chief executive officer, Avendus Capital Public Markets Alternate Strategies.

Some analysts said FPIs seemed to have prioritised developed markets and other perceived safe havens.

“Foreign flows are much lower than those seen in recent months. India’s high valuations relative to history can explain a part of this. That said, several other large EMs, too, saw outflows. Risk aversion ahead of the expected Fed tapering and rising oil prices could have also impacted inflows into crude oil-importing economies,” said Abhiram Eleswarapu, head of India equities, BNP Paribas.

The FPI selling coincides with concerns raised by global brokerages, which include CLSA, Goldman Sachs, and Morgan Stanley, over India’s rich valuations and unfavourable risk-reward.

Institutional flows into the secondary market are expected to remain soft stocks in the remainder of the year.

“We have several IPOs lined up through November, which could soak up some liquidity. This could coincide with the Fed tapering exercise. As a result, we wouldn’t be surprised if FPI and domestic flows get sluggish towards the end of the year. FPIs turning net-sellers could lead to a period of consolidation for the markets, especially in the mid- and small-cap areas,” said Eleswarapu.

Despite the $2.6-billion pull-out, the domestic market has averted any meaningful correction, thanks to the buying support from domestic institutions and retail investors.

The retail liquidity is helping the market offset the adverse impact of institutional selling. Moreover, experts said the FPI selling in recent weeks is only a minuscule portion of their overall holdings.

“Things would have been different if FPIs had sold 1 or 2 per cent of their holdings. Or if retail liquidity was not there. Our dependence upon institutional investors is very high, and it will be premature to conclude we have become retail investor-driven. The market is holding up because the bull run continues, and institutions haven’t sold much,” said Chokkalingam G, founder, Equinomics Research & Advisory.

Chokkalingam rules out major sell-off by FPIs in the future.

“But I don’t expect a big crash as FPIs have learnt a painful lesson by pulling out huge amounts of money first during the Lehman crisis and then in March 2020 after the onslaught of the Covid-19 pandemic. Market capitalisations have doubled across the globe in the past two years. And everyone acknowledges that a huge market crash will lead to a deflationary trend in the economy itself. If there is a third wave and loss of lives, the chances of institutions pulling out money are that much higher,” he added.