Why are Foreign Portfolio Investors (FPIs) are Exiting from the Indian Stock Market?

In the last 7-8 months, Foreign Portfolio Investors (FPIs) have taken out around Rs. 2.25 Lakh Cr. from the Indian Stock Market. The holding of FPIs in the Indian Companies is at 5-year low levels of less than 18%. So, in this article, we will look for the factors which are responsible for such heavy outflows by FPIs in the Indian Stock Market. So let’s get started.

Reasons behind FPI Outflows:

1) Slowing Down of Growth Momentum:

• In FY22, the growth momentum of the Gross Domestic Product (GDP) of the economy, as well as the Corporate Profits, was quite exceptional.
• Corporate Profits were up by around 40%-45% across the board on account of the lower base effect of FY21.
• But now for FY23, this growth momentum is slowing down as earnings expectations are on the higher single-digit side i.e., 8%-9% to around lower double-digit figure of 11%-12%.
• Also, Analysts’ expectation of upgrades to downgrades ratio has changed to 1:3 which means for 1 upgrade rating, there are 3 downgrade ratings by the analyst. The same ratio was just the opposite in the last year i.e., 3:1.

2) Rising US-Bond Yield:

• With the rising interest rate in the USA, the debt asset class has become more attractive. Hence, FPIs are doing profit booking from the equity markets and parking in US Treasuries. US 10-Year G-Sec Yield has already crossed the 3% mark.

3) Rupee Depreciation:

• The high price of Crude Oil imports on account of increased prices has been affecting the Current Account Deficit (CAD) of India which is already at a 3-year high level.
• CAD is one of the major reasons behind the depreciation of the Indian Rupee where FPIs expect that it will fall further which is damaging their profit in dollar terms.

4) Premium Valuation of Indian Stock Market:

• While the major indices of the World Economy are down by around 30%-40% and are in a bearish phase the Indian Stock Market has still not gone into a bear phase and is down by around 15%.
• This premium valuation of the Indian Stock Market is also another reason behind the FPI outflows in the recent past.

What Should Investors Do?

The major indices of the World Economy are already in the bearish phase while the Indian Stock Market has still not entered the bear phase and hence outperforming the global market. The Domestic Institutional Investors (DIIs) are impressively countering the effect of FPIs outflows. From this viewpoint, an investor should not expect high or bumper returns from the equity market like FY22, and hence one should follow a staggered manner of investing.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.