Foreign Investors' Waning Interest in Indian Stocks
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Ever since the US Federal Reserve hinted at tapering of its bond buying programme (popularly known as quantitative easing or QE) in mid-September 2021, foreign investors started turning negative on Indian stocks. Between September and December 2021, their outflows (Table 1 below) from Indian stocks amounted to a little more than Rs 25,000 crore.
Foreign investors in India are officially known as FPIs or foreign portfolio investors.
Even in the first three weeks of 2022, the stock outflows of FPIs amounted to nearly Rs 12,000 crore. Of course, global stocks have seen increased downside volatility in the past one or two months exacerbated by runaway inflationary expectations and fears of Federal Reserve, the US central bank, raising its benchmark interest rates.
Amidst the outbreak of COVID-19 Pandemic in March 2020, FPIs withdrew Rs 62,000 crore from Indian stocks, with Sensex and Nifty 50 indices falling by 23 per cent in the month of March 2020 (the actual drawdown for Sensex between 20Feb2020 and 23Mar2020 was 38 per cent).
This is the typical behaviour of FPIs during the global crises. They tend to take their money back towards their home country (flight to safety). Though their influence on Indian stock market has waned in the past five to six years thanks to increased participation by domestic institutional investors and growing financialisation of savings in India.
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Table 1: FPI Flows into Indian Stocks in 2021 (click image to view better) >
The FPIs were first allowed to participate in Indian stock market in 1991. Several years back, FPIs (earlier known as foreign institutional investors or FIIs) used to own almost a fourth of Indian listed stocks.
In recent years their share has fallen to one-fifth of the total. Last year, FPIs' share has further fallen below 20 per cent.
Table 2: FPI AUC data - Assets Under Custody (click image to view better) >
The figure of Rs 48.57 lakh crore or USD 654 billion (Table 2 above) represents the current value (as on 31Dec2021) of equity investments made cumulatively by FPIs since they were allowed to invest in Indian stocks in 1991.
FPIs hold 18 per cent of listed stocks as at the end of 2021. They used to hold 20 per cent as at the end of 2020. This is as per the data compiled by NSDL or National Securities Depository Ltd.
The value of FPI equity holding increased by 28.5 per cent in rupee terms and 26.4 per cent in dollar terms during the calendar year 2021--helped mainly by the solid 24 per cent return attained by Nifty 50 index in 2021.
Indian government's openness toward stock market flows enabled FPIs to accumulate a large part of listed space over the past three decades. This has helped in broadening the financial markets in India.
FPI flows are typically influenced by the currency expectations (Indian rupee versus US dollar) of FPIs, valuation attractiveness of Indian stocks versus their global peers, and the volatility of the US stock market (represented by CBOE VIX).
FPIs typically tend to invest in large-cap stocks with high free float (which is the number of shares available for trading after the share of promoters), high liquidity and broader shareholding. Their share is high in bluechip stocks, banking and technology stocks in India.
Promoters' share in Indian listed firms is roughly north of 50 per cent of the total number of equity shares.
Though the FPIs' share in Indian listed stocks has come down substantially in recent years, they continue to exert their influence on Indian equity market.
With the FPIs turning negative, it will be interesting to see whether the domestic institutional and retail investors will be able to absorb the selling (if continued further in 2022) from foreign investors. Let us wait and watch!
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P.S.: (cross check of data) The figure of Rs 52,72,593 crore mentioned as FPI AUC in Table 2 tallies with figure mentioned in page 21 of SEBI Bulletin Jan2022 -
Past data:
My Tweet 23Apr2021 - data as of 31Mar2021
References:
My Tweet 03May2018 - FPI investment limits in G-Secs, SDLs and corporate bonds >
Abbreviations used:
FPIs - foreign portfolio investors (foreign investors investing through Indian stock and debt markets)
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
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