Rumours of an interest rate hike by the US Federal Reserve continue to weigh on investor sentiment, with foreign investors withdrawing nearly 12,300 crore rupees from the Indian stock market this month. Going forward, foreign flows into Indian equities may continue to come under pressure from the impending US Federal Reserve rate hike, uncertainty surrounding the Russian-Ukrainian war, oil price volatility, rising domestic inflation and weak quarterly earnings, experts say.
Foreign Portfolio Investors (REITs) remained net sellers for six months to March 2022, netting a whopping Rs 1.48 million from the shares. This was mainly due to the anticipation of an interest rate hike by the US Federal Reserve and the deterioration of the geopolitical situation after the Russian invasion of Ukraine. After six months of booming sales, FPI became a net investor in the first week of April and invested Rs 7,707 crore in the shares. After a short respite, it again attracted net sellers with over Rs 4,500 crore during the short holiday week of April 11-13, and selling continued into the following week.
Filing data showed that this is leading foreign investors to sell net sales of Rs 12,286 crore this month (April 1-22). The strong selloff can be attributed to weak global signals after US Federal Reserve Chairman Jerome Powell hinted at a 50 basis point interest rate hike in May.
Fear of an interest rate hike by the US Federal Reserve continues to weigh on investor confidence. "This may encourage investors to once again take a cautious stance regarding their investments in emerging markets such as India," said Himanshu Srivastava, Associate Director - Head of Research, Morningstar India. Its easy money is shrinking as central banks begin to withdraw excess liquidity in alarming scenarios due to geopolitical tensions.
He also said that higher interest rates in developed markets are usually accompanied by withdrawals of money from emerging markets. In addition to equities, FPI moved a net amount of Rs 1,282 crore from debt markets during the period under review.
According to Srivastava, at the moment, nothing can encourage and convince foreign investors to invest in Indian stock markets. “Besides the impending U.S. Federal Reserve hike, uncertainty over the Russian-Ukrainian war, high national inflation rates, volatile oil prices and poor quarterly results don't paint a very positive picture. such a scenario, REITs generally take a wait-and-see approach until there is more clarity.
He added that under these circumstances and in a rapidly changing global landscape, foreign flows into Indian equities may remain under pressure until there are changes in the underlying drivers and the investment scenario. With headwinds in terms of rising oil prices, inflation, falling GDP, etc., REIT flows are likely to remain volatile in the near term, says Srikant Chauhan, head of equity analysis (detail) at Kotak Securities.
Besides India, other emerging markets including Taiwan, South Korea and the Philippines have seen capital outflows from April to date.
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