Statsguru: FPIs often deploy cheap capital in EMs in search of high returns

Indian stock markets have seen foreign portfolio investors (FPIs) emerge as net sellers in a financial year only four times over the last 29 years. The total quantum of outflows in 2021-22 (FY22) was more than double the sum of all such years.

The FPIs were net sellers to the tune of Rs 1.4 trillion in FY22. They had previously emerged as net sellers of around Rs 88 crore in 2018-19 ahead of the general elections, Rs 14,172 crore in FY16 amid global risk aversion over liquidity tightening and Chinese economic volatility, and Rs 47,706 crore in FY09 during the global financial crisis. FY22 was the worst year on record in absolute terms (chart 1).

  

Mutual fund investments of over Rs 1.7 trillion steadied the ship. They continued to buy even as FPIs’ total stake in Indian listed companies dropped from 23.25 per cent in March 2021 to 21.01 per cent in March 2022 (chart 2).

The outflows are largely said to be because of reduced risk appetite on account of geopolitical tensions after Russia’s military action in Ukraine, and an anticipation of global central banks tightening liquidity. FPIs often deploy cheap capital in emerging markets like India in search of higher returns. Global central banks, especially the US Federal Reserve, are expected to increase rates sharply this year.

India has done relatively better than other equity markets in FY22, though the gap in government bond yields between India and the US has been coming down (charts 3,4).

Another source of foreign flows is foreign direct investment (FDI). Broadly, this covers inflows from global companies looking to set up businesses in India or investing in existing businesses. Unlike portfolio investors who buy and sell shares on the stock market, FDI investment is more stable in nature. India’s net foreign direct investment has largely been stable (chart 5).

Large investments continue to come in sectors such computer software and hardware, according to government data (chart 6). Improving ease of doing business could well help retain these stable foreign inflows.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines