Editorial

Published: Jun 15, 2022
Updated: Jun 15, 2022

Overvaluations put off FPIs

Foreign Portfolio Investors (FPIs) are in withdrawal mood from India. During fiscal 2022, they have pulled out a net amount of Rs 1.22 trillion, which beats the total outflows of Rs 0.84 trillion for 2015-2016, 2018-19 and 2019-20 – the years that saw net FPI outflows over the last 10 years. The situation was all the more disturbing in May 2022 when FPIs continued their selling spree, pulling out nearly Rs 44,000 crore ($ 5.7 billion) from the Indian market.

This is the worst sell-off the market has seen since March 2020, when foreign investors dumped shares worth Rs 58,632 crore ($ 7.9 billion) due to the scare triggered by the Covid-19 pandemic. The sell-off in May 2022 is also the second highest monthly outflow recorded in the Indian market since 1993. The latest (May 2022) sell-off by FPIs is triggered by worries about stagflation as the US Federal Reserve looks to aggressively tighten its monetary policy, followed by central banks of several countries, including the Reserve Bank of India.

Over the last eight months, FPIs have dumped Indian stocks at a pace comparable only with that of the global financial meltdown.

There are several factors prompting FPIs to exit the Indian stock market in droves. Stretched valuations, heightened inflation risks due to a surge in crude oil and global commodity prices, and the aggressive monetary tightening plans of the US Federal Reserve – which may be followed by other countries, including India – are among their key concerns. Experts believe that there are signs of selling exhaustion by FPIs. Says VK Vijaykumar, Chief Investment Strategist of Geojit Financial Services, “There are distinct signs that the selling pressure by FPIs could abate somewhat going ahead.”

What is more, the number of retail investors is on the rise. According to BSE, in March 2022 its registered investor accounts hit the 100-million mark. It took BSE just 91 days to reach the 100-million mark from 90 million. Even the Reserve Bank of India has supported the BSE claim by noting that 3.46 crore demat accounts had been opened in 2021-22 as against 1.42 crore the previous year. During fiscal 2022, on an average, 28.8 lakh demat accounts were opened every month, which is higher than 11.8 lakh per month in the previous year.

However, this does not mean that FPIs are not beneficial to the Indian economy. The heavy inflows by FPIs can provide the Indian economy a non-debt creating source of foreign investment. It also reduces the pressure of the foreign exchange gap. FPIs have an added advantage in terms of flow of resources into capitalscant countries like India. It reduces the cost of capital and increases investment conclusively, raising their output percentage. FPIs can also act as a catalyst for overall development of the stock market in India. The lower cost of capital and a booming stock market can encourage new equity issues in India.