The value of foreign portfolio investors (FPI) holdings in Indian equities have fallen 6 percent (QoQ) in the March quarter to $612 billion, a Morningstar report stated.
The decline is mainly on the back of a massive sell-off by foreign investors amid rising inflation, tightening monetary policy and a correction in the Indian equity markets.
At the end of the March 2022 quarter, the value of FPI investments in Indian equities fell to $612 billion, down from $654 billion recorded in the December 2021 quarter, said the report. On a YoY basis, the FPI investments have risen around 11 percent from $552 billion in the March quarter last year.
Consequently, FPIs' contribution to Indian equity market capitalization also fell during the quarter under review from 18.3 percent to 17.8 percent, added the report.
In the March 2022 quarter, FPIs sold Indian equities worth $14.59 billion as against a net inflow of $5.12 billion in the previous quarter.
Monthly, foreign investors sold assets worth $4.46 billion in January, $4.74 billion in February, and $5.38 billion in March. So far in 2022 YTD, FPIs have sold net assets to the tune of over $18 billion from Indian equity markets.
According to the report, weakness in the global markets triggered risk-off approach inequities.
"The sentiments were dented from the start of the quarter with the US Fed signaling that it would start hiking interest rates soon and shrink its bond holdings. With that information, FPIs chose to move out of the markets that had rich valuations to invest in the ones offering relatively attractive valuation and better risk/reward," it added.
While, the pro-growth budget and normalization in the third wave of the pandemic in India did offer some relief and managed to check the exodus of funds to some extent in the interim; the scenario started to turn grim as the tension started to escalate between Russia and Ukraine, the report noted.
Rising crude prices and surging inflation in the US also continued to worry foreign investors, it added.
Going ahead, foreign flows into Indian equities could continue to be under stress as there is nothing much to cheer up foreign investors and coax them to invest in Indian equities as of now, it said. The ground reality remains grim, the report pointed out.
"Besides the rate hikes by both RBI (Reserve Bank of India) and the US Fed, uncertainty surrounding the Russia-Ukraine war, high domestic inflation numbers, volatile crude prices, and weak quarterly results do not paint an incredibly positive picture. The recent rate hikes could also slow the pace of economic growth, which is also a concern," it further cautioned.
Adding to the worry is the resurgence of COVID-19 cases in China and in some other parts of the world. In such a scenario, FPIs typically turn risk-averse and adopt a wait-and-see approach until greater clarity emerges, added Morningstar.