foreign investors leaving on a jet plane

on March 8 and 9, FIIs (Foreign Institutional Investors) pulled out a whopping $1 billion on each day of trading from the Indian markets. this followed a February which saw the worst sell off from FIIs in India since March 2020, upon the outbreak of the pandemic.

what is scaring foreign investors away from the Indian market?

fear factors

these are some reasons why:

• geopolitical tensions: the conflict in Ukraine has already seen Russia hit with several economic sanctions. with India abstaining in the vote condemning its actions in the UN as well as refusing to cut off relations with Russia, there is a distant possibility that it might also have sanctions imposed on it.
  
• exchange rate: the Indian Rupee hit a record low against the US dollar on March 7. one of the biggest factors here is India’s position as a major importer of crude oil whose prices are skyrocketing. for FIIs who have to convert their market holdings in India back to their native currencies, a weakening Rupee means lesser returns.
  
• inflation: typically when inflation goes up, foreign investors usually hedge risks by trimming allocations in emerging markets and their currencies. they instead prefer commodity exporter markets such as Brazil and Indonesia.
  
• interest rate hikes: central banks across the globe have already implemented or are implementing rate hikes, making borrowing costlier. thus a lot of ‘easy money’ that flowed in is now being pulled out to pay back the low-interest loans that were taken.

ebb and flow

institutional investors are a vital cog of the financial markets. a large number of them are concentrated in financial powerhouses of the world such as New York, London, Singapore, etc. but with those domestic markets being more saturated, they have increasingly invested in emerging markets such as India which saw a record FII (Foreign Institutional Investment) inflow of $37.6 billion in FY21. but with market sentiment turning negative since the turn of the year, they have now withdrawn a total over $29 billion in FY22.

the takeaway here is that the outflow by itself may seem large, but in the bigger picture, it is also a reflection of the heavy inflow that came before. it is also an encouraging sign that domestic investors have stepped up their buying, showing faith in the Indian economy and company valuations.

naturally good investors, such as institutions with plenty of manpower and algorithms, look to invest when they can make profits and cash out when they might make losses. but with the heavy buying interest shown in the Indian market, one expects it’s only a matter of time until valuations become attractive enough or the global market sentiment flips for FIIs to flow back in.