Informist, Friday, Feb 4, 2022
By Vivek Kumar
MUMBAI – Outflow of foreign capital from Indian equities is likely to continue in the near term, what with central banks globally unwinding monetary stimulus and preparing for interest rate hikes to tame inflation. But the pace of such outflows could slow down as much of the selling because of these fears has already taken place.
After the US Federal Reserve signaled a rate hike in March, European Central Bank also refrained from reiterating its earlier guidance of no rate hikes this year.
Bank of England has already raised rates back to back, as it sees inflation soon topping 7%, sharply higher than its target of 2%.
With most major central banks now moving towards policy tightening more aggressively, foreign fund flows into India are set to remain under pressure.
In January, foreign institutional investors net sold Indian shares worth over $4.8 bln. This was higher than their net investments for the whole of 2021.
January was also the fourth consecutive month that FIIs sold equities, worth over $9 bln.
But many market participants believe that the FII outflows will moderate, with some even expecting a trend reversal.
“If you look at previous US rate hike cycles, the selling by FIIs was not continuous,” said Pankaj Chhaochharia, India equity strategist and economist at Antique Stock Broking. “Prior to the taper tantrum in 2013, there were outflows for around three months, and post that the trend started reversing,” he added.
Another factor that points to a likely reversal in the trend or at least moderation in FII outflows is the short covering this week. At the start of February derivatives series, the percentage of short positions in the futures contracts held by FIIs was the highest since March 2020.
In the first few days of this month, 3-4% of these positions were already covered as FIIs took positive cues from the Budget for 2022-23 (Apr-Mar), and some analysts believe the trend may continue going ahead.
However, Chhaochharia believes that elevated crude oil prices may play spoilsport. The price of Brent crude oil surpassed $91 per barrel and closed above this level on Thursday for the first time since October 2014 because of tight supply and tensions between Ukraine and Russia.
India is one of the biggest importers of crude oil, and faces the problem of a higher import bill if prices stay elevated.
Further, even companies are feeling the heat of higher raw material prices, which ultimately weighs on their margin.
SAVIOUR DIIs
Even as FIIs continued to sell, domestic investors remained buyers and this led to the benchmark indices falling just marginally during January.
During the month, DIIs net bought shares worth 164.8 bln rupees, or around $2.2 bln. However, this was lower than the previous month’s 219.2 bln rupees or $2.9 bln.
This was the eleventh consecutive month that DIIs were net buyers.
“The flows have not stopped from domestic investors even after the correction in Nov-Dec, and that is a good sign as it indicates that they are not panicking,” said Rohit Srivastava, founder and market strategist at Indiacharts.com.
All in all, the volatility in fund flows will persist and equities are set for yet another stormy month, as investors stay watchful of high inflation and its impact on policies of central banks. End
US$1 = 74.70 rupees
Edited by Shirsha Thakur
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