 "FPIs")
Rising interest rates globally are reversing India’s availability of capital after record inflows of foreign portfolio investments.
The US Federal Reserve raised interest rates by 0.5 per cent on Wednesday, the biggest single-day increase since 2000. Indices tracking US liquidity conditions have been reacting to expectations of tightening. The Bloomberg United States Financial Conditions Index has been in negative territory for the last ten days in a row.
A negative value suggests tighter conditions compared to the pre-crisis norms. A positive value would indicate easier availability of capital. Similarly, the Goldman Sachs US financial conditions index has also seen a sharp surge, indicative of tighter liquidity conditions.
Money, once available at low interest rates, is said to have pushed foreign investments into emerging markets including India. A reversal of these policies is expected to result in outflows.
The US central bank is expected to increase interest rates further during the year, according to analysts. The US is the largest holder of India’s foreign portfolio investments. It held Rs 18.6 trillion worth of Indian investments as of March 2022, the latest available depository data. This is more than three times the Rs 5.5 trillion held by the second-largest source Mauritius. Foreign portfolio investors were net sellers by Rs -2,074.74 crore (or $272 million) on Thursday-the day after the US Fed raised interest rates.
In further news of tightening global liquidity conditions, the Bank of England raised its key interest rate by 0.25 per cent on Thursday. Global central banks have been raising interest rates to control inflation. The United Kingdom is the fifth foreign portfolio investor in India, accounting for assets worth Rs 2.7 trillion.
Foreign portfolio investors have been net sellers for a while in India markets. They have sold $17.2 billion in Indian equities so far in this calendar year, according to Bloomberg data. This is one of the largest outflows among its peers.
South Korea has seen outflows of $11.5 billion. Countries like Brazil and South Africa have still seen net inflows. Taiwan has seen outflows of $26.4 billion.
Active funds have accounted for a large portion of the recent outflows, according to a 29th April India Equity Strategy report from the foreign financial services group Jefferies. Active funds are those where fund managers take a call on where to invest as opposed to passive ones which buy and sell stocks in the same proportion as an index. Fund managers in both India-dedicated funds and those which invest in other markets as well have both sold during the recent exits, according to the report. Passive funds too have seen outflows while sovereign wealth funds, which directly invest capital-rich countries’ money for use in the future, have continued to bet on Indian stocks.
The outflows are over concerns that the Indian markets may be overpriced, according to the report authored by equity analysts Mahesh Nandurkar and Abhinav Sinha.
“Our recent investor meetings indicate that active managers have reduced India weight by 50-100bps over the last 6-12 months on valuation concerns,” it said.
