Russia-Ukraine crisis Impact: Foreign investor outflows stand at record high in FY22 till date

Foreign investors have remained net sellers of Indian equities in the financial year 2021-22 till date. FPIs have sold Indian equities worth ₹98,886 crore in FY22 YTD, till February 28, which is the highest ever outflow in a financial year till date.

Overall, including all segments (debt and hybrid), FPIs outflows for FY22 (till Feb) stand at ₹72,173 crore, again a record high. Before this, the highest overall net outflow by foreign investors was witnessed in 2008-09 at ₹45,811 crore followed by FPI outflows in FY19 at ₹38,930 crore and then FY20 at ₹27,528 crore .

Meanwhile, just in Indian equities, FPIs sold worth ₹47,706 crore in FY09 and ₹88 crore in FY19 but bought equities worth ₹6,153 crore in FY20.

The record-high outflows by foreign investors in FY22 come on the back of rapidly escalating geopolitical tensions as Russia invades Ukraine, surging crude oil prices as it crosses $110 per barrel, expectations of an aggressive interest rate hike by the US Fed and a rising dollar. Analysts globally expect 5-7 policy rate hikes by the Fed in 2022.

These external risks forced foreign investors to withdraw money from India to invest in safer assets and developed countries.

February was the fifth consecutive month that witnessed outflows with the FPIs selling Indian equities worth ₹35,592 crore, the highest ever since March 2020, when the Indian markets witnessed massive sell-off due to COVID. In March 2020, outflows by foreign investors in Indian equities stood at ₹61,973 crore.

Meanwhile, in January 2022, this figure stood at ₹33,303 crore.

Uncertainties around Ukraine and Russia with US and UK imposing sanctions on Russia post its invasion of Ukraine has led to a 12 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.

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.

However, even though the foreign investors seem to have lost confidence in Indian equities, the domestic investors and mutual funds have been consistently infusing funds in Indian equities countering some of the negative impacts due to the foreign outflows.