Foreign Investors Make Highest Ever Annual Net Outflow Of Rs 1.21 Lakh Crore From Indian Stocks In 2022

After three back-to-back years of infusing massive funds into Indian equity markets, foreign portfolio investors (FPIs) have retreated in a big way in 2022, with the highest-ever yearly net outflow of nearly Rs 1.21 lakh crore, as per a PTI report.

The massive net outflow is despite the Indian stock market's Sensex and Nifty outperforming most of the major stock market indices this year.

Double The Outflow Of 2008's Financial Crisis

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The huge outflow, which surpasses by a big margin the previous record of Rs 53,000 crore net withdrawals done in 2008, came amid aggressive rate hikes by central banks globally, including India¡¯s RBI, but 2023 is expected to be better on positivity about overall macroeconomic trends in India, experts said.

Besides the global monetary tightening, volatile crude oil, rising commodity prices, the Russia and Ukraine conflict led to an exodus of foreign money in 2022.

As of December 28, FPIs had made a net withdrawal of Rs 1.21 lakh crore (nearly USD 16.5 billion) from the Indian equity markets and a net pullout of around Rs 16,600 crore (USD 2 billion) from the debt market (compared to Rs 10,359 crore in 2021 and Rs 1.05 lakh crore in 2020), as per the data available with the depositories.

This was the worst year for FPIs in terms of flow and withdrawal from equities following a net investment in the past three preceding years. FPIs made a net infusion of Rs 25,752 crore in equities in 2021, Rs 1.7 lakh crore in 2020, which was the best year, and Rs 1.01 lakh crore in 2019.

A net outflow was last seen in 2018 (Rs 33,000 crore), while 2022 would be only the fifth year in the history of FPIs when they have been net sellers of Indian equities, the other three being 2011 (Rs 27,000 crore), 2008 (Rs 53,000 crore), and 1998 (Rs 740 crore), as per the report.

On the domestic front, the scenario was not encouraging. Rising inflation continued to be a cause for concern, and to tame that, the RBI also hiked rates, which cast a shadow on the growth prospects of the domestic economy, said Himanshu Srivastava, associate director and manager of research at Morningstar India.

Another important aspect that led to the outflows from domestic stock markets was its high valuation compared with other comparable markets, he added, as per PTI.

Also Read: Analysts' Prediction Indian Stock Market For 2023

Predictions For 2023?

Going ahead, from a short- to medium-term perspective, FPIs are expected to continue with their investments in Indian equities but in a restrained manner, Morningstar India's Srivastava said.

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FPI flows in 2023 would be determined by a host of factors, such as the US Federal Reserve's policy stance, oil price movement, and developments in the geopolitical situation, says Sanjiv Bajaj, Joint Chairman and MD of Bajaj Capital.

This year, most of the major central banks started normalising monetary policy, which resulted in the departure of hot money from emerging markets, including India. This caused an unprecedented rise in prices (inflation) in the majority of economies, he added.

FPIs have used the debt segment to park investments from a short-term perspective in the wake of uncertainties on the equity side. Accordingly, they kept on buying intermittently in the debt segment, thereby checking outflow from the segment, Morningstar India's Srivastava said.

"Broadly, from the risk-reward perspective and with interest rates rising in the US, Indian debt doesn't appear to be an attractive investment option for foreign investors", he added.

India, on an average, receives 2-3% of the global cross-border portfolio equity flows.

Since the year 2000, the current year is only the fourth year when Indian equities have witnessed a net outflow.

The massive selling by FPIs has been absorbed by domestic institutional investors (DIIs), including mutual funds and insurance companies. This is a reflection of the rising clout and maturity of domestic investors.

FPIs This Year

FPIs started the year 2022 on a negative note, and the departure of "hot money" continued until June. In the first six months of this year, FPIs pulled out Rs 2.17 lakh crore from equities, largely due to central banks globally, and particularly US Federal Reserve ending its ultra-easy pandemic-era monetary policy.

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This was followed by a series of aggressive rate hikes, thereby checking the liquidity in the system, as the report mentioned. FPIs gradually started making a comeback in the Indian markets in July with a net investment of Rs 4,989 crore and Rs 51,204 crore in the succeeding month, largely because the Indian economy and Indian markets have been more resilient during these testing times, the report mentioned.

However, again, they withdrew money in September and a miniscule amount in October.

The change in stance from FPIs has been seen since the last week of October, when they started pouring money, and the momentum continued in December too.

This positive stance could be attributed to the resilience shown by the Indian markets amidst global turmoil; besides, stabilising inflation numbers in the US raised hopes that the US Fed may not go for further aggressive rate hikes.

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