Foreign portfolio investors (FPIs) have withdrawn a whopping $27 billion from the Indian markets since October. The figure is similar to what they acquired during the previous two years. While FPI purchases in calendar years 2020 and 2021 clocked $27.1 billion, they offloaded shares worth the same over the last eight months, Bloomberg data show.
FPIs have been net buyers of Indian equities in almost every year since 2010, with 2011 and 2018 being the exceptions. While the Nifty50 had corrected 24.6% in 2011, the index yielded a moderate return of 3.2% in 2018.
However, despite massive sell-off by FPIs this time, the markets have been remarkably resilient as domestic buying strongly absorbed foreign outflows. The return expectations of retail investors are shaped by returns of the past one-two years. The large investment by DIIs reflects robust inflows into domestic mutual funds, led by new investors and an increase in SIP flows. After the outbreak of Covid, a new set of investors has emerged.
While stretched valuations and aggressive policy tightening by central banks have led to mass exodus of foreign investors from the Indian markets, local investors have pumped in an equal amount. As a result, combined holdings of domestic mutual funds and direct households in stocks have risen over 600 basis points (bps) since 2015. “Domestic investors are about to become larger holders of Indian equities than FPIs for the first time since 2010,” wrote Morgan Stanley in a strategy note last month.
Financials and technology stocks, where FPIs park almost half of their money, witnessed massive selling during the period, whereas companies in staples were the most sought after ones, despite higher valuations and margin pressure owing to rising input costs. Market participants are of the view that FPIs selling is unlikely to subside till the tension between Russia and Ukraine eases and inflation begins to stabilise.
Among major emerging markets, Taiwan witnessed the highest selling by FPIs so far in 2022 totalling $28.4 billion. India, which saw an outflow of $21.4 billion, came second. In contrast, Brazil attracted inflows of $8.7 billion as they bet on high exposure to the commodity upcycle and cheap valuations.
Despite a 11.2% fall since April 4, the Nifty50 is currently trading at 17.8 times of its one-year forward earnings. In contrast, Brazilian Bovespa commands 6.7x, whereas the Jakarta Composite and the Stock Exchange of Thai trade at 16.8x and 16.2x, respectively.