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6th June 2022 (7 Topics)

Why are FPIs dumping Indian stocks?

Context

Foreign portfolio investors (FPIs) have been on a selling spree in India.

About

Foreign portfolio investment (FPI):

  • Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors.
  • It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.
  • In the Indian context, FIIs (along with sub-accounts with FIIs) and QFIs can be collectively classified as Foreign Portfolio Investment (FPI).
  • Their investments typically include equities, bonds and mutual funds.
  • They are generally not active shareholders and do not exert any control over the companies whose shares they hold.
  • The passive nature of their investment also allows them to enter or exit a stock at will and with ease.

Difference between Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI)

  • FPI consist of securities and other financial like Bonds, Mutual Funds held by an investor in another country.
  • It does not provide direct ownership of the asset and is relatively liquid. They are basically short term investors.
  • FDI lets an investor purchase a direct business interest in a foreign country. They are long term investments.

What factors spur FPI moves?

  • Promise of attractive returns on the back of economic growth draws investors including FPIs into a country’s markets.
  • For example, as per data from the National Securities Depositories Ltd. (NDSL), FPIs brought in about ?3,682 crore in 2002.
  • This grew to ?1.79 lakh crore crore in 2010.
  • The year 2017 saw FPI inflows exceed ?2 lakh crore.
  • The nationwide lockdown triggered concerns around economic growth.
  • In tandem, benchmark stock index Sensex fell from 42,270 in February 2020 to 25,630 in March 2020.
  • FPIs also show keenness to invest in bonds when there is a favourable differential between the real interest rates on offer in the country they aim to invest in, and other markets, but more specifically, compared with the largest economy in the world, the U.S.

Why have FPIs been selling India holdings?

FPIs sold assets worth ?44,000 crore in May 2022. This is the second highest sell-off in a month since 1993, after March 2020. Some of recent events:

  • Uneven recovery: Post-pandemic, recovery in the Indian economy has been uneven. 
  • Supply-side Shortage: The pace of recovery caught suppliers off guard, contributing to supply-side shortages.
  • Ukraine Crisis: As supplies in general tightened across the globe, commodity prices too rose and overall inflation accelerated. 
  • Consumption expenditure too has remained weak in the subcontinent.

With each of these factors contributing to a decline in confidence of robust economic performance, foreign portfolio investors have been reducing market investments over these past months.

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