DIIs salvage record breaking $26 billion FPI exit
- Mutual funds invested Rs 155,000 crore since October in the market.
- Investors invested over Rs 10,000 crore through systematic investment plans (SIPs) of MFs every month.
$26 Billion FPI exit and Role of DIIs
- Record outflows of Rs 201,500 crore ($ 26 billion) by foreign portfolio investors (FPIs) since October 2021.
- It is the biggest sell-off in the history of the Indian capital market.
- A major crash in the markets was averted as domestic institutional investors (DIIs),
- Mutual funds pumped Rs 240,250 crore ($ 31 billion).
- The sustained selling by FPIs in the last 7.5 months have even overtaken the previous record sell-off by FPIs when Rs 116,250 crore, or 15 billion $ was pulled out during the global financial crisis between January 2008 and March 2009.
Reasons for FPI exit
- Covid pandemic (March 2020)
- FPIs pulled out over Rs 85,250 crore ($ 11 billion) from India.
- Markets pulled back and recovered later when the economy recovered from the impact of the Covid pandemic.
- Reasons for Present sell off
- Relatively high valuations in India
- Rising bond yields in the US
- Appreciating dollar
- Possibility of a recession in the US
- Aggressive tightening by Fed policy
Fundamental reason behind current inflation
- When the global economy took a hit.
- Central banks across the world slashed interest rates and announced liberal monetary policies.
- This helped the economies to recover, but
- Led to higher consumption
- The surplus liquidity in the financial system
- This phenomena created higher than expected inflation.
Higher Inflation and Central Bank response
- Inflation rising to new levels in major economies like the US and Eurozone.
- Central banks have started tightening the monetary policies and hiking interest rates.
- Inflation in India surged to an 8 year high of 7.79 per cent in April
- Prompting the RBI to hike Repo rate by 40 basis points to 4.40 per cent.
- Inflation has risen to multi-decade heights across several economies.
- The US CPI inflation was at around 8.3 in April.
- The CPI inflation in the UK surged to 7.0 per cent in March, the highest in the data series.
- Overall, Euro area annual inflation reached a new peak of 7.5 per cent in April primarily driven by energy and followed by food, alcohol and tobacco,
- Even among BRICS economies, inflation in China rose to a five-month high of 2.1 per cent in April as supply pressure worsened due to widespread lockdowns.
- This has resulted in a sharp sell-off across financial markets worldwide since April.
Current market dynamics
- Recently, there were signs of selling exhaustion by FPIs and DII and retail buying is emerging as a strong counter to FPI selling at higher levels.
- The ownership of FPIs in Indian stocks has fallen by around two percentage points in the last two years to 19.5 per cent as of March 2022
- The rupee has also fallen in the last one year, weighed down by rising inflation, interest rates, exit of foreign investors and plunging markets.
Prelims take away
- FPI and DII
- Fundamentals of Inflation
- Repo Rates