FPIs pull out ~196 bn on fiscal, rupee fears

Rising crude oil price, trade wars make investors nervous; risk-reward stays unattractive

Foreign portfolio investors (FPIs) have pulled out a combined ~196 billion from Indian debt and equity markets so far in September, on concerns of widening current account deficit following rising oil prices, a sliding rupee, and global trade wars.

According to latest official data from NSDL, FPIs have withdrawn a net ~107.46 billion from the equity market and ~88.78 billion from the debt market between September 3 and September 26, taking the total to ~196.24 billion ($2.7 billion).

FPIs, according to analysts, have been more nervous as regards the debt market, given the sliding rupee, fiscal and current account deficits.

“India has been an off-benchmark bet for FPIs in debt markets. Going ahead, flows into equities will also depend on the overall flows into emerging markets. There is bound to be some nervousness as we head closer to the general elections. The recent IL&FS event also dents confidence. It is difficult to say whether there will be

outflows, but some moderation is on the cards going ahead,” says Gautam Chhaochharia, head of India research, UBS Securities. FPIs were net sellers for five out of six months in FY19 so far in the equity segment, and have pulled out ~272 billion.

The Sensex, falling 5.6 per cent so far in the month, is set to post its sharpest monthly decline since February 2016, while the mid-cap and small-cap indices have dipped 9.5 per cent and 11.5 per cent, respectively.

Domestic mutual funds (MFs), on other hand, have remained bullish and continued to pour into Indian equities and have been net buyers for 26 consecutive months. Since August 2016, MFs have made net investment of ~2.41 trillion into equities, shows Sebi data.

However, the quantum of flow over the past few months has reduced with their net investment totalling ~157 billion in the July–September quarter, as compared to an average

~300 billion during the past five quarters. In September, their investments in equity and debt segments have touched ~288 billion.

Industry experts, however, are not alarmed by the developments and suggest investors have been churning money (intra-asset allocation) between balanced, arbitrage, debt and equity segments within the broad mutual fund space. Events such as confusion over dividend distribution tax, grandfathering of longterm

capital gains and regular profit booking also impacted the overall market sentiment and flows, albeit to a limited extent.

“I would not attribute the slowdown to any major negative sentiment. Flows into the systematic investment plans (SIPs) have been healthy. That said, HNIs’ (high net worth individuals) flows into mutual funds have tapered off as they have been increasing allocation to portfolio management (PMS) and alternate investment funds (AIFs). So, the drop in mutual fund flows has been actually diverted to these two segments. Domestic investors have prevented markets from falling at a time when the foreign investors have sold out,” explains Sunil Subramaniam, managing director and chief executive officer of Sundaram Mutual.

Chhaochharia of UBS sees the Nifty50 index at around 10,500-levels in December 2018. He maintains that the risk-reward for the markets remains unattractive despite the recent correction. Information technology and private banks with retail liability franchises are among his top overweight sectors.