FII selling in Indian equities exceeds $19 bn to touch new record

Indian equities have come under the siege of unprecedented selling by foreign funds for the past six months, as frothy valuations, sluggish earnings growth, inflationary pressures and geopolitical tensions raise concerns about the growth prospects of the South Asian nation.

Foreign portfolio investors have sold more than $19 billion of equities — a new record — so far in the current fiscal year, surpassing the sell-off triggered by the global financial crisis in 2008.

Foreign funds liquidated more than $14 billion in Indian equities between October 2021 and February 2022, and the selling accelerated in March with FPIs cashing out nearly $5 billion worth of shares so far this month.

Analysts and market experts believe the selling in March — which is already the highest since March 2020 when funds booked profit due to the coronavirus-induced panic selling — may get worse as the month progresses. Foreign funds had sold $8.35 billion of shares in March 2020.

The current spell of foreign outflows has had a ripple effect on the currency market, with the Indian rupee hitting its all-time lows 77.365, while bond yields spiked to multi month highs of 6.955%.

The aggressive selling signals a risk-off trade and profit-taking amid rising concerns that a spike in international crude oil prices may impact India's economy and put upward pressure on inflation that may prompt the central bank to raise interest rates even as corporate earnings growth continues to trail expectations.

Earlier this week, Brent crude oil futures contract for May delivery surged to $139.13 a barrel, its highest level since 2008, while West Texas Intermediate (WTI) oil futures for April delivery rose to $126.28 a barrel.

Crude oil prices have been inching toward record levels the last few days as sanctions on Russian oil exports would drastically curtail supplies from the market. 

Higher crude oil prices have a domino effect on inflation and the economy’s other metrics such as current account deficit (CAD), production and transport costs, and interest rates among others, analysts said.

“Oil hurts (India’s) current account and adds indefinite pressure besides increasing sensitivity to United States Federal Reserve rate hikes,” said Dan Fineman, co-head of Equity Strategy, Credit Suisse Asia Pacific Securities Research.