After five months of sustained buying, foreign investors have turned net sellers and pulled out over Rs 2,000 crore from the Indian equities in the first week of August, mainly due to Fitch downgrading the credit rating for the US.
In addition, the rich and stretched valuations and minor profit booking could be the reasons for this outflow, Yes Securities Chief Investment Advisor Nitasha Shankar said.
"A sharp spike in the U.S. 10-year bond yield above 4% is a near-term negative for capital flows to emerging markets," Geojit Financial Services Chief Investment Strategist VK Vijayakumar said.
If the U.S. bond yields remain high, FPIs are likely to continue selling or at least refrain from buying, he added.
According to the data with the depositories, foreign portfolio investors withdrew a net sum of Rs 2,034 crore from Indian equities during Aug. 1-5.
This came after unabated net inflow in the past five months — from March to July — following the resilience of the Indian economy amid an uncertain global macro backdrop.
Moreover, FPIs invested over Rs 40,000 crore each in the last three months (May, June and July).
The net inflow was Rs 46,618 crore in July, Rs 47,148 crore in June and Rs 43,838 crore in May. Before March, overseas investors pulled out Rs 34,626 crore in January and February.
Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, attributed the latest outflow to global credit ratings agency Fitch downgrading the credit rating for the United States to AA+ from AAA. This dented the sentiments, resulting in foreign investors turning cautious.
To curb inflation, the US Fed raised its benchmark lending rate during its last meeting by 25 basis points, reaching its highest level since 2001. It also signalled the possibility of more hikes going ahead and ruled out the likelihood of rate cuts any time soon.
The potential impact of rate hikes on global liquidity would have led foreign investors to reevaluate their investment decisions, Srivastava added.
However, overseas investors injected Rs 1,151 crore into the Indian debt market during the period under review.
With this, inflow in the equity market reached Rs 1.21 lakh crore, and while the same for debt stood at Rs 21,600 crore so far this year, data with the depositories showed.
In terms of sectors, FPIs continued to buy auto, capital goods and financials. Besides, a significant change in FPI's strategy is that they have started buying IT stocks, which they have been selling earlier.
Alekh Yadav, Head of Investment Products, Sanctum Wealth, believes that domestic equities will see FPIs inflow, given the country's relatively better position going forward.
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