HDFC Bank-led FPI selloff: The fifth-highest weekly exit since 2008

The hardening of US Treasury yields also weighed on sentiment and raised concerns about whether the Federal Reserve would lower interest rates at the same pace as the Street has priced

Foreign portfolio investors (FPIs) sold shares worth Rs 20,170 crore ($2.4 billion) last week. This marked the fifth-highest weekly outflow from overseas funds since the beginning of 2008 and the largest since the last week of March 2020.

Due to the Covid scare, FPIs had sold shares worth Rs 21,951 crore during that week, causing the market to decline by nearly 20 per cent.

The previous week’s pullout was mainly due to selling in HDFC Bank, a stock with one of the highest FPI exposures on an absolute basis. Foreign investors sold HDFC Bank’s stock following disappointing quarterly results by the lender and concerns about its loan growth and net interest margin contraction.

Reacting to the private sector lender’s results, FPIs withdrew Rs 10,578 crore from equities on January 17 — the highest withdrawal from the domestic markets in a single day.

While last week’s pullout ranks among the most significant in the history of the domestic markets, its impact on the overall markets was relatively muted.

The S&P BSE Sensex declined about 1.2 per cent last week, despite shares of HDFC Bank — the biggest weight in the index — slumping 11 per cent.

During other record bouts of selling, the markets had tanked between 4 per cent and 19 per cent.

“I suspect it has more to do with emerging market funds. At the beginning of the week, news flows were pointing to China not performing well, and interest rates not falling as quickly as one hoped; there might have been redemption pressures. Because of the bad results of the bellwether stock in the banking sector, there was a focused effort to reduce weighting in that particular stock. However, the selling was not just related to India,” said Andrew Holland, chief executive officer of Avendus Capital Public Markets Alternate Strategies LLP.
 

The hardening of US Treasury yields also weighed on sentiment and raised concerns about whether the US Federal Reserve (Fed) would lower interest rates at the same pace as the Street has priced in.

Last week, Fed and European Central Bank officials argued that rate cuts should not be done hastily. Moreover, some data points, including the surge in inflation in the UK, led investors to pare their bets on a rate cut by the Bank of England. The US 10-year bond yield hit 4 per cent amidst doubts about the trajectory of rate cuts.

Going forward, Holland said the results season and global factors will continue to determine the trajectory of the flows.

“The global factors have been quite supportive over the past few days, helping overall sentiment. Other than results, no real current catalyst could take the markets higher unless there is marked improvement in the global sentiment,” said Holland.

FPIs were net buyers in the first week of this month; however, after last week’s selloff, the year-to-date investment tally has slipped into the negative.

In 2023, they bought shares worth Rs 1.7 trillion, one of the highest-ever net purchases in a calendar year.

A combination of strong earnings and economic growth, hopes of the Fed ending the rate-hike cycle, and investment opportunities through block deals and other private issuances have also supported the inflow tally last year.