‘Hot Money’ Evaporates As FPI Outflow Nears Rs 1 Lakh Crore
This could make 2018 the worst year in terms of foreign portfolio investments in the Indian capital markets.
Foreign investors’ portfolio investments, long known as “hot money” that comes in fast but can go out even faster, seems to be the underlying theme for the Indian capital markets as 2018 draws to a close, with net outflows nearing the Rs 1 lakh crore mark.
This could make 2018 the worst year in terms of foreign portfolio investments in the Indian capital markets and follows a record net inflow of about Rs 2 lakh crore into equities and debt securities in 2017, as per data available with the depositories and exchanges.
As of now, the foreign portfolio investors have made a net withdrawal of about Rs 87,000 crore from the Indian markets with about a fortnight of trading remaining.
Analysts warn the trend may continue in the wake of negative sentiments about possible changes in the regulatory framework after the sudden change of the Reserve Bank of India governor and the emerging political scenario.
The net outflow by FPIs in the debt market is already more than $7.6 billion (nearly Rs 52,700 crore) this year, while equities have seen a net outflow of $4.6 billion (about Rs 35,000 crore).
The overall net outflow of over Rs 87,700 crore (about $12 billion) so far, even if it does not rise further, can make 2018 the worst year for Indian capital markets in terms of overseas investment since 2002, the last year for which segregated FPI data for equity and debt markets are available.
“Rates hikes in the U.S. and reshuffling of portfolio money across the globe, rupee depreciation and crude rise were all contributors for higher FPI pull out,” Vidya Bala, head of mutual fund research at FundsIndia.com said. “India also lost to emerging markets in terms of foreign money allocation given the lower valuations in other markets at the beginning of 2018.”
“Added to this, the uncertainty on the domestic political front, ahead of an election year, may also have contributed to FPIs staying on the sidelines,” he added.
Himanshu Srivastava, a senior analyst at Morningstar Investment Adviser, cited the same reasons saying that impact of these factors on the country’s macroeconomic condition have dampened FPI sentiments. “On the global front, the escalating trade war between the U.S. and China has caused widespread uncertainty in emerging markets,” he added.
Going into 2019, Srivastava said the flows would be range-bound as FPIs may continue with a cautious stance until there are concrete signs of economic recovery and certainty over the formation of a stable government after the general elections.
Valuation is also another concern. India is among the better-performing markets in recent times as well as over 3- and 5-year period. Therefore, valuations of Indian stock markets are on the expensive side. This is also a good enough reason for FPIs to look at other comparable options available at attractive valuations and at a similar risk level.Himanshu Srivastava, Senior Analyst, Morningstar Investment Adviser
Bala said FPIs will keenly watch the election results next year and decide which sectors to enter and until then they might prefer to stay defensive with sectors such as information technology and consumer goods.
Before 2018, FPIs were net buyers of Indian equities for six consecutive years. Prior to that, FPIs had pulled out money from the Indian stock market in 2011. Before that, FPIs had turned net sellers in 2008.
Even in 2018, FPIs began on a positive note by pumping in money, but the trend got reversed soon amid weak global cues and an introduction of long-term capital gains tax on equity investments. After a brief recovery in March, the sell-off has continued for the most part of the year.