Foreign institutional investors (FIIs) gave India a miss in October withdrawing a record Rs 38,906 crore from the market- the highest ever amount in a single month ever- due to rising bond yields in the US and volatility on the bourses at home. FIIs have been on a withdrawing spree in September and October on the back of US providing more attractive options for investing. In September, they pulled out Rs 21,035 crore from the Indian capital market.
Foreign institutional investors are the institutional investors which undertake investment in securities and other financial assets of the country they are based out of.
The Sensex too plunged 4.92% in October and 6.25% in September owing to factors such as IL&FS crisis affecting mid caps and small caps stock and FIIs withdrawing from India due to rising bond yields in the US.
Dr VK Vijayakumar, chief investment strategist at Geojit listed three factors for the record outflow of FII funds in October.
Rising bond yields in the US
In October, the 10-year bond yield touched 3.26 percent. This "risk-free return" was very attractive for institutional investors.
Tightening by the Fed
Tightening by the Federal Reserve triggered capital outflows from emerging markets to the US. This weakened emerging market currencies negatively impacting the returns on FII investment.
In India, particularly, markets are expected to remain volatile in the coming months due to political uncertainty. May be FIIs are biding time."
A host of other factors such as strengthening of the US economy, falling of rupee and surge of the US dollar also led to the waning of foreign institutional investors' interest in the Indian market.
Not only in October, FIIs logged a record Rs 95,071 crore outflows in 2018, the highest ever in a calendar year.
Mustafa Nadeem, CEO at Epic Research said, "Since the beginning of financial turmoil in August 2007, US Fed's balance sheet has changed in size and composition. Its total assets have increased from $869 billion to well over $2 trillion.
The Federal Reserve has its interest rate close to its December target of 2.50%. FOMC has adopted "Normalization approach" that is shrinking its balance sheet. The US economy is back on track while EU is still struggling to stabilize. All the events have added up to a stronger dollar which has eventually caused the outflow of capital from emerging markets.
On domestic fronts, we have a depreciating INR, widening current account deficit, unjustified valuations and a full year of political uncertainty.
While the Nifty index was able to sustain after a 10% correction owing to high flow in mutual funds, small and midcap stocks have corrected 25-40%. We believe the fund pull out by FIIs can continue till January 19."
However, FIIs have returned to the Indian market in November with a net inflow of Rs 5,332 crore till date. Cooling of crude prices and an appreciation in the rupee have turned the tide in their favour, it seems.
Rahul Agarwal, Director Wealth Discovery/EZ Wealth said, "There are several reasons that can be attributed to this sell-off, the primary being the rising US bond yields and the strengthening of the US economy along with a stronger US dollar. Geo-political risks in the shape of US/China trade war and the re-imposition of sanctions on Iran have led to investors seeking safety in safe havens such as the US.
These factors are pretty much common for all emerging market economies, in the Indian context, things were further exacerbated by the concurrent rise in crude oil prices and an exceptionally quick depreciation in the Indian rupee that raised concerns about the current account deficit and its negative implications on the Indian economy.
The IL&FS fiasco and the subsequent liquidity crunch in the shadow banking industry deeply affected the Indian debt markets and contributed to the sell-off in the debt segment primarily from the FIIs.
Indian equity markets were over-heated in terms of valuations for a long time, the recent sell off in the equity markets have created pockets of opportunity in terms of value picks, the concomitant fall in crude prices and Rupee appreciation has turned around the sentiment and this is evident in the FII trading pattern as they have been net buyers in both equity and debt segments in the Month of November."