Indian Stocks: FPIs sell Rs 2 lakh crore in Indian stocks in 8 months. Could this sell-off turn bearish?

New Delhi: A frequent occurrence in domestic equity markets over the past eight months has been a plan by foreign portfolio investors to moderate inflation in the US amid rising global commodity prices and the Federal Reserve’s plan for aggressive rate hikes.

Foreign Portfolio Investors so far in 2022 (FPI) has sold Indian shares worth a net Rs 1.81 lakh crore. Total sales since October 2021 have crossed Rs 2 lakh crore, which is Rs 2.2 lakh crore.

Higher interest rates in the world’s largest economy and consequently stronger U.S. Dollar Diminishing the appeal of assets in risky emerging markets like India. The global strength of the dollar has weakened the rupee by about 4.5 per cent against the greenback in 2022 so far. A weak rupee destroys the returns of FPIs from Indian assets.

A sharp rise in global commodity prices since Russia’s invasion of Ukraine in late February has also dampened appetite for domestic stocks as India faces massive exposure to inflation, a broader import bill and global growth. The reason is facing downside risks to growth.

While the unfavorable global outlook remains,

Vinod Nair, Head of Research at Services, told ETMarkets that while FPI selling may continue in the near term, he expects sales to decline in the “short to medium term”.

“This is because economic slowdown, fast monetary policy, supply crunch and high inflation are involved in a major part of the changes in the economy. Market Prices, which were consolidating in the last 7 months,” Nair said. The BSE Sensex and NSE Nifty 50 have lost 13 per cent and 12 per cent respectively, touching their lifetime highs in October 2021 – coincidentally, the month the FPIs started selling.

Analysts say a fall in the headline index has improved the valuation outlook.

As a result of market correction and profit expansion, valuations based on valuation methods have fallen to reasonable levels.”

wrote in a note earlier this week.

“On an ex-post basis, the forward P/E for the Nifty 50 index is at around 18x its lowest level since CY16 (excluding the brief COVID period), while the P/B at 3x is at its long-term average level and’ Market cap to GDP is marginally above the ‘100 per cent mark,'” the brokerage said.

However, over the next few trading days, FII outflows are likely to continue as a higher-than-expected inflation print in the US strengthened the case for the Federal Reserve to raise interest rates at an aggressive clip.

US inflation hit a 40-year high of 8.6 per cent in May, data released after Indian trading hours on Friday showed.

After raising a total of 75 bps so far in 2022, the Fed is seen raising rates by 50 bps each in June and July. The Fed will provide details in the next policy statement on June 15.

As of now, monthly FPI net inflows are negative in anticipation of a bullish FOMC meeting. This sell-off may reverse if the announced current and future policy measures are in line with the market outlook and vice versa,” Nair said.

“…future inflation will depend on war and growth of sugar supply, which may ease in the short to medium term,” he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not represent the views of The Economic Times)