Uncertainty Surrounding India’s FPI Likely to Continue as it Hits its Six-Month Low: Report

Uncertainty Surrounding India’s FPI Likely to Continue as it Hits its Six-Month Low: Report

Ira Singh
5 Sep’23

Foreign Portfolio Investments (FPIs) in India have hit a six-month low, intensifying the prevailing uncertainty in the financial markets, as per media report. The downward trend in FPIs is raising concerns among investors, policymakers, and analysts about the health and stability of India’s economy.

As concerns about an impending rate hike in the US arise, foreign portfolio investment flows (FPIs) into Indian markets have decreased in August following a strong inflow from April to July, according to a media report.

This led to higher bond yields and a stronger dollar. August saw the weakest inflows since February. Due to worries about a rate hike, emerging countries have begun to pull out.

The portfolio flow data is inclusive of investments made on the primary market and in wholesale transactions. After three months of nonstop buying in the cash market, foreign portfolio investors (FPIs) were net sellers,said VK Vijayakumar, chief investment strategist at Geojit Financial Services.According to Vijayakumar, the main factor driving FPIs to sell in the cash market has been the rise in US bond yields and the strength of the dollar index, both of which are detrimental to capital inflows. He said that the financial industry’s profit-booking practices also played a role in the selling by FPIs.

Siddharth Khemka, head of retail research at Motilal Oswal Financial Services Ltd., who maintained that, the uncertainty is likely to persist. “There is no clear trend. Uncertainty has increased with no clear indication of the US Federal Reserve’s outlook from US jobs data. The China factor remains another major concern,” Khemka said .However, block agreements and private equity fund investments show that there is still significant wide market activity. According to analysts, market demand is still quite high as evidenced by subscriptions to initial public offerings (IPOs). Despite their positivity, the market trend is expected to continue to be erratic.Another rate increase will affect the currency and liquidity, and there are negative risks, according to Khemka.

India is presently facing threats over rising oil prices and uncertainty, raising concerns.

“Currency volatility is again a major risk, and dry weather conditions in September could also add to concerns,” Vikram Cassatt, head of advising at Prabhudas Lilladher Pvt Ltd said. He also pointed out that there may be additional variables, such as inflation rates.

According to Cassatt, Malaysia is the only other Asian market that has had inflows that are higher than those of China, South Korea, and a number of other nations that have experienced significant outflows.“India can continue to outperform other emerging markets,” Cassatt said.

Nishit Master, a portfolio manager at Axis Securities PMS, mentioned that depreciation in rupee versus dollar valuation arbitrage, which could push flows to the Chinese market because it is less expensive, as well as potential increases in energy prices and inflation, are factors that could have a “not very positive” impact on FPI flows in the short term.

On brighter side, FPIs have been selling in the majority of emerging economies in August, primarily as a result of the strengthening dollar and declining bond yields. However, they have performed well in India as compared to other rising markets.

In terms of economic growth, India is doing well. The robust profit trajectory seen during the first quarter also helped to underpin the markets.

According to Master, the majority of developed markets, including the US, Japan, and the EU (European Union), are either experiencing a recession or have relatively poor growth rates. Even China’s growth has fallen short of market estimates and is predicted to continue to be weak moving forward.

The only big country that would experience substantial growth and draw FPI inflows in such a case is India, according to Master.

Master predicts that FPIs would continue to pour into India despite the dearth of investment prospects.

The report underlines that the uncertainty surrounding FPIs in India is likely to persist in the near term, given the combination of global uncertainties, regulatory changes, and domestic economic challenges. It underscores the importance of a balanced approach that ensures national security interests are protected while maintaining a welcoming environment for foreign investors to promote economic growth and stability.As the situation continues to evolve, stakeholders will closely watch for any developments that could provide clarity and encourage foreign investors to re-evaluate their positions in the Indian market.