Foreign Investors' Waning Interest in Indian Stocks - vrk100 - 21Jan2022

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. 

CFA Charter credentials  - CFA Member Profile

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

 

Market Outlook-VRK100-14062011

Market Outlook

In a state of flux

Rama Krishna Vadlamudi, HYDERABAD June 14, 2011


With Sensex hovering around 18,250 and Nifty well below 5,500 at the end of June 13, 2011, the Indian stock market looks to be in a lackluster phase. Investors seem to be worried about inflationary concerns, GDP growth deceleration, lack of governance, policy paralysis and political controversies surrounding anti-corruption stirs. However, investors are looking to a good monsoon, some solution to the anti-corruption agitations and some policy reforms. It remains to be seen whether investors’ expectations will be met. More rate hikes are expected from Reserve Bank of India in this fiscal year.

Inflation

Food inflation proves to be a nemesis for the Government with the latest figures showing a jump in food inflation to 9.01 per cent for the week ended May 28, 2011 compared to previous week’s 8.55 per cent. There is a big mismatch between supply of and demand for food items. Adding to the supply constraints is the rise in demand for food fuelled by rising income levels for the middle income groups in the urban as well as rural areas. Government seems to be having no right solution to control the food inflation in the immediate future. The Government seems to have passed on the buck to the RBI.

RBI rate hikes

Reserve Bank of India has been increasing policy interest rates for the past one year in order to contain inflationary expectations in the economy. It is expected to increase the benchmark repo rate by another 25 basis points or 0.25 per cent when it announces the mid-quarter review of its monetary policy on June 16th. The rate hikes are expected to continue for another two to three quarters. The markets have been bracing themselves for a further rate hike of 50-75 basis points in policy rates in this fiscal year. The banks may absorb some of the rate hikes themselves by compromising on their net interest margins and may pass on only a portion of the rate hikes to borrowers. The banks’ margins at present are at elevated levels giving them some cushion to absorb the rate hikes.

India’s GDP Growth

In the last four quarters, India’s GDP growth has come down substantially. After touching a high growth of 9.40 per cent (year-on-year) in the January-March 2010 quarter, the growth rate has come down progressively to 7.80 per cent in the January-March 2011 quarter. But the consumption theme seems to be in good shape despite the visible signs of a slowdown in the economy.

FII inflows

After pumping in $ 17.5 billion in 2009 and $ 29.4 billion in Indian equity markets, foreign institutional investors (FIIs) have slowed down their investments in Indian stock market during this calendar year. At $ 85 million of net inflows in this calendar year, their investments have been almost negligible. However, in the first two weeks of this month, they have put in $ 467 million or Rs 2,103 crore in the Indian equity market. The FII appetite for Indian stocks will depend on several global factors, including inflationary concerns in India. The US Federal Reserve (Fed) has been buying bonds worth $ 600 billion. The buying programme, known as Quantitative Easing 2 or QE 2, is coming to an end on June 30th. It is not yet clear whether the Fed will continue or stop its easy money policy after June 30th. If the Fed continues with another round of bond buying or QE 3, this easy money from the US will chase commodities and may push up commodities’ prices which may be negative for India in general.

Commodities

In the last one month, most of the commodities have come off their inflated levels. Silver has lost 30 per cent from record levels of close to $ 50 (per ounce) levels to $ 35.5 now. Crude oil on Nymex has come down to $ 97 (per barrel) levels with Brent crude hovering around $ 119. But gold prices remain steady at around $ 1,530 per ounce. Gold may continue its dream run for some more time as Europe is going deeper and deeper into a bigger mess following the sovereign crisis affecting Greece, Portugal, Ireland and Spain adversely. The latest news from Europe is that Standard and Poor’s has cut Greece’s rating making it the least creditworthy nation. The ratings agency cut Greece’s rating three notches from B to CCC and said the country was likely to default on its debts at least once by 2013. With such anxieties, most of the commodities may come down going forward but gold may remain at elevated levels because of its status as a ‘safe haven’ asset in times of economic woes.

India imports 80 per cent of its crude oil demand making it vulnerable to oil prices. High oil prices increase inflationary expectations in India which in turn adversely impacts India’s growth rate. High oil bill is likely to increase fiscal deficit as the Government is unable to pass on fully the rise in international oil prices to consumers. Diesel, LPG and Kerosene are heavily subsidized in India.

With problems persisting in the Middle East, low inventories and lack of spare capacity, crude oil prices may not come down significantly in the near future unless something dramatic happens in OPEC (the body of oil exporters).

The US dollar index (against a basket of six major currencies, like, Euro, Yen and Pound Sterling) is around 74.5. The US dollar has been weakening against these major currencies in the last six months. However, in the last one week, it has shown some resilience and the index has moved up from lows of 72.5 to the present 74.5. The dollar’s overall weakness is pushing up commodities’ prices to some extent.

Global factors

The Dow Jones is at around 11,950 well below 12,000 after reaching a high of 12,800 recently. The S & P 500 is hovering around 1,270 after reaching a high of 1,360. The US indices have been in a bullish range in the last six to eight months. However, the Asian indices have been mostly in bearish territory. The Shanghai Composite (China) is at a low level of 2,700. The Hang Seng (Hong Kong) index is at 22,500 and Nikkei 225 is at a weak level of 9,400. The FTSE 100 and DAX indices are much stronger at 5,770 and 7,080 respectively.

China is going through its own problems. The non performing assets of Chinese banks are expected to go up significantly in the next one year. The central bank there has been increasing interest rates to tackle inflation. China wants its growth rates to slow down a bit to avoid any hard landing. There are concerns of overinvestment and overcapacity in China’s manufacturing sector. Following the global financial crisis of 2007/2008, China had pumped in huge amounts into its infrastructure and manufacturing sector.

Summary

The Indian Government and the RBI have to tackle inflation both from the fiscal and monetary angles. Some economists have suggested that allowing Indian rupee to appreciate against the US dollar may help in containing inflation in India. The data from RBI indicates that it has not been intervening in the foreign exchange market. The Government and RBI have to take both immediate and long-term measures to tackle inflation head on. However, the Government seems to be in some sort of a gridlock embroiling itself in controversies about how to tackle corruption monster. The general impression is that the Government may not be able to push the economic reforms forward in such a situation. The disinvestment programme seems to be in a limbo. The markets have noticed this policy drift and have been expecting further slide in stock indices. Investors need to be cautious at this point of time. As such, it is not a bad idea to hold some cash and wait for a correction and start buying Indian stocks at Sensex levels of between 16,500 and 17,500.

US FED RATE CUT and ITS IMPACT ON FINANCIAL MARKETS-VRK100-17122008

US Federal Reserve Rate Cut 

and its Implications 

By: Rama Krishna Vadlamudi, Mumbai
Date: Dec.17,2008

US Fed funds rate at near zero:

The US Federal Reserve had on December 16, 2008 cut its benchmark interest rate, US Fed Funds rate, to a historic low of 0% to 0.25% for the first time since 1954. The cut was made from 1% to a low of 0% to 0.25%, signifying a cut of at least 75 basis points. Previously, the US Fed used to set a specific target for the Fed funds rate. However, this time it has set the target rate in a narrow range of 0% to 0.25% which is quite unprecedented. The federal funds rate is an overnight lending rate among banks/financial institutions in the US. The rate is also used as a benchmark rate by banks to fix interest rates for other loans, like, mortgage loans, business loans, consumer loans and loans to credit card holders. The US Fed uses the federal funds rate as a tool to balance its objectives of economic growth and price stability. Whenever inflationary expectations are high in the economy, the US Fed tries to control inflation by increasing the fed funds rate. On the other hand, if there is a slowdown in the economy, it will try to inflate the economy by lowering its benchmark rate. With the US inflation down to 1.7%, the Fed has shifted its focus to growth in the last 15 months.

What the Fed wants to achieve:

The US economy is in trouble. Officially, it has been in recession for more than a year. The job market is very bleak with the unemployment rate going up to 6.7% at the end of November 2008. During this current year alone, the total number of unemployed persons in the US has gone up by 2.7 million with the total unemployed persons at 10.3 million as at the end of November 2008. Consumer spending has been on a downward spiral. Business investment and confidence are extremely low. Banks have been unwilling to lend to businesses or consumer spending for fear of loan defaults. The US companies are reporting heavy losses, with the latest being a quarterly loss of USD 2.1 billion, by Goldman Sachs-its first loss since it went public in 1999. To tide over this crisis, the US Treasury and the US Fed have been trying to revive the US economy. The US Government has announced a bailout package of USD 700 billion a few months back to save the economy. Since September 2007, the fed funds rate has been cut from a high of 5.25% to the present range of 0% to 0.25%. By reducing the rates, the Fed wants to stimulate the US economy. This way, the US Fed hopes to prevent the economy from falling into a deeper depression from the current recessionary trend. Only time will tell whether the US authorities will be successful in their efforts.

What are the implications:

The fact that the US Fed has cut its key fed funds rate to near zero is an open admission by them that their country is in deeper crisis than anticipated earlier.

Anticipating a cut by the US Fed, the major currencies, Euro, Pound and Yen have rallied against the US dollar. The dollar’s slide against other major currencies may continue for some more time. Other countries and central banks may also react to the US rate cuts in the next few weeks.

The US Fed has further said that it would buy long-term government bonds. Currently, US Treasurys are at record high prices. With the decision of the Fed to purchase long-term bonds, the bond prices may go up so high that the yields might be unattractive for investors, especially, banks. By buying more government bonds, the US Fed would make the Treasury yields less attractive for banks so that the banks will be encouraged to resort to normal commercial lending operations, thereby unfreezing the credit markets.

The big bailout packages, US Fed rate cuts and other extraordinary measures mean that the US has been printing more and more dollars for economic revival. More dollars in the system means more budget deficits. The implication is that long-term bond holders are taking on considerable risk with their investments in US Government securities at this point of time. The falling interest rates and the rising US deficits are potential negatives for the dollar.

Market reaction:

Stock Markets: After the rate cut, the US stock markets have reacted positively to the news. The benchmark-Dow Jones Industrial Average-index on 16.12.08 had closed at a level of 8,924, up 360 points or 4.2% from previous day’s close. Whereas, Nasdaq has closed at 1,590, up 82 points or 5.4% and S&P 500 closed at 913, up 45 points or 5.1%.

Bond Market: The US bond market also has rallied after rate cut. The US Government bond prices have gone up pushing the yields further down. Yields of some important Treasurys are given below:

US Treasury	Yield % as on 16.12.08	Remark
Benchmark 10-year	2.36
30-year bond	2.86	For the first time in its history it dipped below 3% on 15.12.08
2-year note	0.65
3-month bill	0.03	For the past few days, it is hovering around 0%

Crude oil market: Crude oil market has not reacted much to the Fed’s decision signifying that the demand for oil may not see any revival as long as the world economy continues to be in recession. The Nymex crude oil price is hovering around USD 44 a barrel. Obviously, the current hypothesis that a weak dollar will push up commodities’ prices is not proved correct this time. Moreover, OPEC is meeting in Algeria today, i.e., December 17, 2008 and it is expected that the organization may agree on an oil output cut of two million barrels a day. Oil market may be looking for cues from OPEC rather than from the US Fed’s rate cuts. The decision by the OPEC is expected in the next few hours.