DIIs salvage record breaking $26 billion FPI exit

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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
    • Inflation
    • 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