FPIs pull out $900 mn from Indian market on widening CAD in Sept quarter

Continuing their selling spree in the September quarter, foreign investors pulled out $900 million from the Indian equity market on widening current account deficit due to a surge in oil prices and depreciating rupee.

This comes following a net outflow of equities worth $3.04 billion by foreign portfolio investors (FPIs) during the April-June quarter, according to Morningstar Investment Adviser India.

On a month-on-month basis, FPIs were net buyers of equities worth $330 million in July and $260 million in August. However, they turned net sellers of $1.49 billion in September.

FPIs adopted a cautious stance towards India and other emerging markets from the start of the quarter.

"Initially, easing crude oil prices, improvement in the rupee against the dollar, encouraging macro indicators, better earnings from Indian Inc, correction in the mid-/small-cap space, and positive observations of the International Monetary Fund (IMF) on India helped the domestic markets touch record highs, thus prompting FPIs to relook their India allocation," the report noted.

While the direction of FPI flows was positive, quantum of net infusion was much lower than what we have seen in the past when they come with full conviction. This indicates that there was a fair bit of uncertainty and cautiousness among FPIs when investing in the Indian equity market, it added.

"Further, the scenario turned adverse towards the end of the quarter on account of widening current account deficit due to a surge in oil prices, depreciating rupee, concerns over the government's ability to meet fiscal deficit targets, and lower-than-expected GST collection fanned uncertainty over the country's macro outlook," the report noted.

"This, coupled with India's expensive valuation, triggered a sell-off from FPIs in September," it added.

On the global front, prospects of further rate hikes by the US Federal Reserve and escalating trade war fears induced risk-aversion among foreign investors, it added.