Foreign investor inflows may slow on increase in Fed rate

Domestic institutions may cushion some of the blow

MUMBAI: Foreign investors, who have pulled out nearly $240 million from Indian stocks since the beginning of the year, may continue selling after Wednesday’s interest rate increase in the US, but domestic institutions which have supported the markets so far are expected to cushion some of the blow, experts said.

Wednesday’s quarter percentage point increase—the second hike this year and the seventh since it started increasing lending rates in 2015—takes overnight lendingrateintheus toarange between 1.75% and 2%. The US Federal Reserve’s rate-setting panel also signalled two more rate hikes this year and dropped its pledge to keep rates low enough to stimulate the economy “for some time”.

Indian markets were nervous on Thursday, with the BSE’S benchmark indexsensexclosing at 35,599.82 points, down 139.34 points, or 0.39%, while the Nifty was at 10,808.05 points, down 48.65 points, or 0.45%.

According to Kamlesh Rao, managing director and CEO of Kotak Securities Ltd, markets have by and large digested the fact that Fed will raise rates steadily.

“FIIS (foreign institutional investors) have been net sellers in this year; so, markets have already bought it in and sustained that. As as long as the DII (domestic institutional investor) inflows continue, I don’t think markets will see much impact on account of Fed increasing rates,” he said. Rao says if domestic liquidity is intact, it will cushion the outflow of foreign money from India.

Higher interest rates tempt large foreign funds to move their money to the US, hurting emerging

May 2018

Jun 2018* markets including India which are already struggling with a stronger dollar and expensive crude oil.

Till date this year, FIIS were net sellers of Indian shares worth $238.47 million but have pumped in $66 million in June so far. In contrast, DIIS have bought shares worth ₹54,394.23 crore this year so far, and ₹5,922.77 crore in June alone. In 2018 so far, Sensex has gained 4.53% while the MSCI World and MSCI Emerging Market indices have surged 7.47% and 3.55%, respectively.

Reuters

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