Great FPI flight: Investors pull out Rs 480 bn in 2018; highest in 10 years

The latest withdrawal is much higher than outflow of Rs 412 billion, witnessed in entire 2008, during global financial crisis

Overseas investors have pulled out nearly Rs 480 billion (Rs 48,000 crore) from Indian capital markets in the first six months of 2018, making it the steepest outflow in a decade, following high crude oil prices and trade war worries.

They withdrew a net sum of Rs 414.33 billion (Rs 41,433 crore) from the debt markets, besides, a net amount of Rs 64 billion (Rs 6,430 crore) from equities during January-June period of the year, taking the total outflow to Rs 478 billion (Rs 47,836 crore), latest update with depositories showed.

This was the biggest outflow since January-June 2008, when foreign portfolio investors (FPIs) had pulled out Rs 247.6 billion (Rs 24,758 crore) from the capital markets -- equity and debt.

Moreover, the latest withdrawal is much higher than the outflow of Rs 412 billion (Rs 41,216 crore) witnessed in the entire 2008 -- during the global financial crisis.

Interestingly, this is only the second time, when FPIs had taken a bearish stance on the capital markets in the first six months of the year.

"FPI outflow and inflow is dependent on many macro and micro factors. Our macros are very closely linked to the price of crude oil, which is the largest import bill for India. Increase in crude oil leads to an increased current account deficit and high domestic inflation.

"Rising current account deficit is putting pressure on INR exchange rates and higher domestic inflation will put upward pressure on interest rates. Weaker exchange rates and higher interest rates make dollar return weaker for FPIs, which leads to withdrawal of funds," said Reliance Securities Head of Retail Broking Rajeev Srivastava.

Besides, US interest rates are on rise, which further incentivises withdrawal of foreign liquidity, Srivastava added.

Echoing similar views, R Sreesankar, co head-equities at Prabhudas Lilladher said: "We already run trade deficit and in addition we are importing roughly 85 per cent of crude requirement, any increase in global crude prices will have a further impact on trade deficit and more importantly the Rupee with everything else reaming as normal. This also adds up to the pressure".

It has been a bumpy ride this year as far as FPI flows are concerned and the fluctuations in net flows at times have been massive, thus making the entire proposition unpredictable.

While in January, FPIs invested a net sum of Rs 223 billion (Rs 22,272 crore) in the capital market. However, in February they were net sellers to the tune of Rs 117 billion (Rs 11,674 crore). On the other hand, they again turned positive in March and put in Rs 27 billion (Rs 2,662 crore).

However, they tooka bearish stance in April and the momentum continued till June. Over the past three months, overseas investor withdrew Rs 610 billion (Rs 61,000 crore).

"Undoubtedly, this year has been extremely unfavourable from FPI flow perspective. This could be attributed to multiple factors. There has been significant outflow from India focused offshore funds and exchange-traded funds (ETFs) which contributes a significant portion towards FPI flow," Morningstar India Senior Analyst Manager Research Himanshu Srivastava said.

Moreover, he said that India is currently fraught with higher crude prices and depreciating Indian currency.

"The expectation is that the currency may depreciate even further if US Federal Reserve continue to hike rates. The increasing interest rates in the US does not augur well for the emerging economies like India and lead foreign investors to shift their focus to US," Srivastava said.

Broadly, India has to offer a better risk-reward profile, as against comparable countries, to foreign investors to attract their investments. Currently, with the challenges Indian economy is facing, it seems FPIs have chosen to look for other alternatives, he added.