Foreign investors withdrew $26.3 billion out of emerging markets in September, marking the first monthly outflow since June following US Federal Reserve's hawkish stance that pushed bond yields higher, according to a report by the Institute of International Finance.
Non-resident investors took out $7 billion from emerging market fixed income in the previous month, the first net outflows since March amid renewed tensions in the Middle East.
The pressure on emerging markets come after Federal Reserve hiked benchmark interest rates for the first time since 2023 and flagged inflation risks. Following the hike, US Treasury yields significantly surged, dollar roser and saw investors pulled back from certain riskier assets.
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"The pressure built in the second half of the month, as hard currency bond funds turned to outflows in the week of the FOMC decision and EM dollar credit spreads widened," Reuters quoted the report.
"Looking ahead, a hawkish Warsh Fed that projects further hikes, a BoJ (Bank of Japan) at its highest policy rate since 1995 and broad tightening across advanced economies all raise the hurdle for EM carry into the fourth quarter," it added.
In terms of India, foreign portfolio investors turned heavy sellers of Indian equities in September, offloading stocks worth Rs 35,861 crore on a net basis. The selling continued into October, with FPIs withdrawing another Rs 9,232 crore so far. The selloff comes after strong FPI inflows in July and August, when foreign investors bought Indian equities worth Rs 20,200 crore and Rs 29,631 crore, respectively.
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Why Are FPIs Selling?
In additon to Fed hike, heavy FPI selling has been driven by rising US bond yields, concerns over persistently high crude prices and weak monsoon rains.
"FPI selling in the recent days has been huge. The surge in the US 10-year bond yield to above 5.2 % and concern that crude might remain elevated for longer also influenced the renewed FPI selling. Sustained FPI selling has significantly weakened the Indian market which witnessed eight consecutive weeks of losses. The poor monsoons this year with 13% deficient rains also impacted sentiments, according to V K Vijayakumar, Chief Investment Strategist, Geojit Investments Limited.
When Will FPIs Turn Positive?
According to Vijayakumar, a reversal of the FPI selling will need positive developments including decline in crude and US bond yields. In the coming days, the market will be influenced by the FY27 Q2 results. Companies that report good Q2 numbers along with positive management commentary are likely to witness buying. Sustained buying by DIIs and retail investors has been supporting the market preventing a major crash.
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