FPI holdings in domestic equities down 2% to $654 bn in Oct-Dec: Report

The value of foreign portfolio investors' (FPI) holdings in domestic equities reached USD 654 billion in three months ended December 2021, a drop of nearly 2 per cent from the preceding quarter, according to a Morningstar report.

This was largely on the back of a massive sell-off by foreign investors and a correction in the Indian equity markets, especially in the large and mid-cap sectors.

"At the end of the quarter ended December 2021, the value of FPI investments in Indian equities fell to USD 654 billion, which was lower than USD 667 billion recorded in the previous quarter, a fall of around 2 per cent," the report noted.

As of December 2020, the value of FPI investments in Indian equities had been USD 518 billion.

Consequently, FPIs' contribution to Indian equity-market capitalisation also fell during the quarter under review to 18.3 per cent from 19 per cent for the three months ended September 2021.

Offshore mutual funds form an important component of total foreign portfolio investment, apart from other large FPIs, such as offshore insurance companies, hedge funds, and sovereign wealth funds.

During the quarter ended December 2021, FPIs were net sellers in Indian equities to the tune of USD 5.12 billion compared with the net inflow of USD 563.43 million in the previous quarter.

On a month-on-month basis, foreign investors offloaded net assets worth USD 1.81 billion in October, USD 0.79 billion in November, and USD 2.52 billion in December.

Despite significant sell-offs in the last quarter of 2021, FPIs remained net buyers in the Indian equities to the tune of USD 3.76 billion for the full calendar year, which was significantly lower than the net inflow of USD 8.42 billion in 2020.

It was not the best of start for the year 2022 with respect to FPI flows in Indian equities, and overseas investors accelerated the pace of outflows after the US Fed signalled that it would start hiking interest rates soon and shrink its bond holdings, thus indicating an end of the ultra-loose monetary policy regime.

"Also, global bond yields have surged recently on expectations of interest-rate hikes by the US Fed. This has made investors risk-averse, prompting them to cut exposure in riskier assets and move toward safe havens such as gold," the report mentioned.

On the domestic front, the pro-growth budget did manage to check the exodus of funds to some extent. However, the wider effects of the budget over longer periods on foreign flows remain to be seen, it added.

Further, the normalization in the third wave of the pandemic in India could offer some relief. So far in 2022 (till February 4, 2022), FPIs were net sellers in Indian equities to the tune of USD 4.95 billion.