Reasons for FPI selling: Ukraine-Russia war, high crude and commodity prices, Fed rate hikes

High crude and other commodity prices are expected to adversely impact importing countries like India. It seems to have spooked FPIs who are exiting India in hordes.

5 Reasons for the unprecedented FPI selling in recent months

Foreign Portfolio Investors (FPIs) are foreign investors (resident in a foreign country) who invest in Indian financial markets. In India, FPIs are regulated by SEBI. They are allowed to invest in equity markets, debt markets, and other markets as permitted by SEBI in consultation with the Government from time to time. FPIs are an important source of foreign investment in India. As per NSDL data, FPIs invested Rs. 1.03 lakh crores in India in the calendar year 2020, and Rs. 50,089 crores in the calendar year 2021.

Foreign Portfolio Investors (FPIs) have been net sellers of Indian equities since October 2021. The last six months have seen relentless FPI selling, which has led to outflows of more than Rs 1 lakh crore.

Chart: FPI outflows

FPI Outflows

The above chart shows how the FPI outflows have intensified in January and February 2022. As per IndiaInfoline, the FPI outflow in March (till 11 March 2022) is $5.3 Bn. Between October and March 2022, FPIs have sold Indian stocks worth $19.72 Bn, which is the highest outflow seen in a financial year.

Even during the 2008 subprime crisis, the outflows were $16 Bn between January 2008 and January 2009. So, what has spooked foreign portfolio investors?

Reasons behind the FPI selling

Here are some key reasons why foreign portfolio investors are selling Indian stocks:

1) Russia-Ukraine war

The Russian troops’ build-up at the Russia-Ukraine border since the start of 2022 had already created uncertainty among FPIs. When the war started in the last week of February, there was panic across global markets. This aggravated FPI sales. Earlier, it was believed the conflict would be resolved quickly. But it has now stretched for six weeks, with no sign of a truce.

Also Read: Top 5 Industries Affected By Ukraine-Russia War

2) High crude oil price

When the Russia-Ukraine war started, crude oil prices started rising. On 8 March 2022, Brent Crude Oil price hit a high of $127.98 per barrel. Even in the last week of March, crude oil was trading at $100+ per barrel. For a country like India that imports more than 80% of its crude oil requirements, the high prices will adversely impact it.

3) High commodity prices

The prices of many commodities, such as copper, aluminium, steel, zinc, nickel, etc., are either at multi-year highs or lifetime highs. The high commodity prices are expected to put margin pressures on end-user companies and reduce their profitability. It may lead to future earnings downgrades, which leads to selling by FPIs and others. FPIs are selling Indian stocks and shifting money to commodity exporting countries like Brazil.

Also Read: Crude Oil, Gold Or Copper: Which Are The Best Commodities To Trade In India?

4) Fed interest rate hike

The US Federal Reserve hiked interest rates in March 2022. It has guided six more interest rate hikes in 2022 and a few more in 2023. With higher interest rates in their home country (US), FPIs will prefer to sell Indian stocks and deploy the money in the US.

5) High valuation of Indian stocks

In 2021, the Indian stock markets hit new lifetime highs and continued to trade at higher valuations for most of 2021. Since the start of 2022, there has been a small correction, but stock valuations continue to be higher than long-term averages. Even after the Russia-Ukraine war induced a small correction, the Sensex and Nifty are within 10% of their all-time highs as of the end of March 2022.

Also Read: 6 Ways In Which The Russia-Ukraine Conflict Will Hit Global Markets

Conclusion

All the above factors have created a lot of uncertainty. In the current situation, where the valuations are on the higher side, FPIs prefer to book profits in Indian stocks. Some FPIs are waiting on the sidelines for the war to end and valuations to turn attractive again. Others have shifted allocation to commodity exporting countries or gone back to investing in their home country (US).

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