On June 17, domestic equity benchmarks, the Sensex and the Nifty hit new 52-week lows. The Sensex hit its fresh 52-week low of 50,921.22, while the Nifty plummeted to its 52-week low of 15,183.40 during Friday's intraday trade.
One of the reasons for the decline is that foreign institutional investors have continued to sell their holdings, with equities worth over ₹1.92 lakh crore being sold off in 2022.
So far in June, FPIs have pulled out ₹31,430 crore. June is the ninth consecutive month that FPIs have been net sellers in India, taking the total to nearly Rs. 2.5 lakh crore during this period on the back of global monetary tightening led by the US Federal Reserve to tame inflation and the negative impact of the Russian-Ukraine War.
According to the RBI study, capital outflows to the tune of $100 billion (around ₹7,80,000 crore) are likely to take place from India in a major global risk scenario or a black swan event, The Indian Express reported.
As per the study, there is a 5-per-cent chance of portfolio outflows from India of the order of 3.2 per cent of GDP or $100.6 billion in a year in response to a Covid-type contraction in real GDP growth or a GFC (global financial crisis) type decline in interest rate differentials vis-a-vis the US or a GFC type surge in the volatility index (VIX).
"In an extreme risk scenario or a black swan event in which there is a combination of all these shocks, there is a 5 per cent chance of outflows under portfolio investments of 7.7 per cent of GDP and short-term trade credit retrenchment of 3.9 per cent of GDP," said the RBI study on "Capital flows at Risk".
According to the RBI report, these estimates assume significance when assessed against the total stock of portfolio investment in India of $288 billion and short-term trade credit of $110.5 billion at the end of December 2021.
For India, portfolio flows are the most sensitive to shifts in risk sentiment globally and spillovers. Equity flows have tended to be more volatile than debt flows and have been associated with large outflows during the Global Financial Crisis, the taper tantrum, the US Presidential election of 2016 and COVID-19.
The report said debt flows turned negative with the onset of the pandemic. "The tapering announcement by the US Fed in May 2013 led to heavy outflows by foreign portfolio investors from both equity and debt markets, and especially from the debt segment.
Similarly, global risk aversion driven by the outcome of the US Presidential elections and expectations of an increase in the Federal funds rate culminated in intense selling pressure in equity and debt segments from November 2016 through January 2017, it said.