Domestic institutional investors (DII) recorded the highest inflows in Indian equities in the month of February since March 2020. The DII inflows stood at $5.6 billion in February.
On the other hand, foreign investors turned net sellers for the fifth consecutive month in February, withdrawing funds worth $5 billion during the month. Since October 2021, the FIIs have withdrawn a net $14.6 billion from Indian equities so far.
While it seems like foreign investors have lost confidence in Indian equities, the domestic investors have been consistently infusing funds in Indian equities countering some of the negative impacts due to the foreign outflows. DIIs have been net buyers consecutively since March 2021. Since then, they have infused net $21.2 billion into Indian equities.
| Month | FII Outflows/Inflows ($ bn) | DII Inflows/Outflows ($ bn) |
|---|---|---|
| February 2022 | -5 | 5.6 |
| January 2022 | -4.8 | 2.6 |
| December 2021 | -1.7 | 4.1 |
| November 2021 | -0.8 | 3.6 |
| October 2021 | -2.3 | 0.6 |
| September 2021 | 1.1 | 0.8 |
| August 2021 | 1.0 | 0.9 |
| July 2021 | -1.7 | 2.5 |
| June 2021 | 1.5 | 1.0 |
Uncertainties around Ukraine and Russia with US and UK imposing sanctions on Russia post its invasion of Ukraine has led to an over 15 percent fall in Indian markets from its record highs hit in October 2021. Further, the rising crude oil prices pose risks to the budgetary calculations and it leading to a rise in inflation may force the Central bank to raise rates faster.
Despite this major fall, analysts at Morgan Stanley believe Dalal Street appears to be relatively calm. “Historically, India’s relative stock prices to EM have reacted poorly to oil price increases caused by supply outages,”it said in a note.
Morgan Stanley said that the over 25 percent jump in oil prices will expand the current account deficit by 75 bps and inflation by 100 bps on an annualised basis for India. "However, India’s oil consumption relative to GDP is at all-time lows and is steadily declining especially since 2014. This bodes well for the economy. India’s oil consumption as a share of GDP is now marginally below the 10-year average since 2017," it added.
It further noted that India' dependence on Foreign Investors to fund the current account deficit has also seen a shift. It stated that the rising share of domestic investors has also helped in offsetting the risk posed by FPI.
The Economic Survey expected the crude oil price to remain at an average of $75-77 per barrel for the coming year, which is not looking very plausible. Hence, this can lead to inflation rising more than expected and growth missing forecasts in 2022.
Experts believe that it will take some time for the foreign investors to return back to India, at least till the uncertainty surrounding Russia and Ukraine are not over. Further, the corporate earnings also remain at risk as the rise in crude oil prices will adversely impact raw material costs across sectors and hence the companies may face margin pressure in the coming quarters.
