FPI are dumping Indian stocks, Should it worry retail investors?

Are you also wondering, what has happened to the Indian Stock market?

After a phenomenal bull for 2 years, we are witnessing bearish kinds of markets recently. One major reason for it is the FPIs. 

Foreign portfolio investors are resiliently selling Indian stocks, In just May itself they have pulled out Rs.40,000 crore from the Indian equity markets.
 
To understand how they impact your portfolio, you need to learn a bit about them.

Foreign portfolio investors are those investors who invest in stocks, bonds, and mutual funds of other countries; they do that primarily to take advantage of the high returns of the assets in other nations.

The Indian economy is among the fastest-growing economies in the world. With our rich resources, and young population, we are growing rapidly. FPIs don’t want to miss the growth and hence they have been investing heavily in Indian markets.

For example, as per data from the National Securities Depositories Ltd. (NDSL), FPIs brought in about ₹3,682 crores in 2002 which grew to ₹1.79 lakh crore in 2010.

In 2017, their holdings exceeded 2 lakh crores. Since the domestic retail participation is abysmally low in India, this kind of investment clearly gave them the power to make or break the Indian markets.

One testament to it is the crash of 2008, during that time, the international markets crashed and FPI's pulled out their investments from the India markets, which resulted in a crash in the Indian markets as well!

In 2020 as well they withdrew ₹1.18 lakh crore in March alone - the month when India announced a nationwide lockdown, triggering concerns around economic growth. In tandem, the benchmark stock index Sensex fell from 42,270 in February 2020 to 25,630 in March 2020.
 

Now, they are again on a selling spree as they have sold equities worth 1.69 lakh crore in just 2022 itself! Now you may ask why are they selling off their investments and if it should be a reason of concern for Indian investors!

Well, as you must be aware that the macroeconomic conditions currently are not that great, the pandemic has hit most nations, there have been prolonged lockdowns, due to which the consumer spending has decreased, there have been supply side issues, the economies have been out of shape on top of that there has been a war going on in Russia and Ukraine, now a war does not only impact the two countries that are fighting it but countries across the globe.

As they say, the world has become a global village, and we rely on each other for different goods, likewise most countries rely on Russia and Ukraine for Wheat and Crude oil, which are essential commodities. These nations couldn’t export them as their operations were disrupted. 

Both pandemic and war have resulted in decreased supply, as a result of which the commodity prices started increasing across countries, which resulted in high inflation in most nations.

Now, to combat inflation, what most countries do is they increase the interest rates, what happens is when interest rates are higher, the money supply in the economy is less, people spend less, and inflation is contained. Sounds Simple right?

The Federal bank also did the same, it hiked the benchmark interest rate from 0-0.25% in March to 0.75-1% in May and is expected to rise by 50 basis points at each of the next two Fed meetings.

When the differential between the interest rates in the U.S. and other markets narrows, and if such an occurrence is accompanied by the strengthening of the dollar, then the ability of investors to realize healthy returns is impacted.

Because returns for FPI are not just measured by value appreciation of the assets but it also includes the exchange rate changes into account, and whenever the dollar appreciates against rupees, a foreign investor is able to realize fewer dollars for its investment as it is liquidated in rupees.

Say an investor invested Rs.1000  in Indian market, and lets assume that 1$ = 100 INR,  and he gets  15% returns on his investments,  so his investment would now be worth Rs. 1150, which is equal to 11.5$  now let's assume the dollar appreciates and now 1$  = 120 INR, so if he sells his investments now, he would get around 9.5$, which is even lesser than his capital, so the exchange rate is very crucial for foreign investors.
 
Now, whenever FPIs sell their assets, they exchange the money for dollars which results in an increased supply of rupees in the global market, due to which the value of the rupee depreciates further and this keeps on going. I know, it sounds a bit complicated but it's just an 11th class economic lesson of demand and supply.

How does it impact retail investors?

Well, we discussed above how these investors can make or break the Indian markets, but the recent data shows that they no longer dictate the Indian markets.

As per the data, FPIs have sold shares worth more than 1.69 lakh crore rupees in the current calendar year (CY22). While earlier this kind of selling pressure by FPIs was their in the 2008 crisis, which resulted in the collapse of markets. However, now the dynamics have changed, In the last 2 years we have witnessed increased participation from the domestic investors.

As per data from the Securities and Exchange Board of India (SEBI), DIIs have bought shares worth nearly Rs.95,500 crore in the first three months of CY22. Mutual funds have been net buyers at nearly Rs.70,000 crore in the same period. 

Even amidst the huge sell-off, the markets are up 5% in CY22, clearly demand by domestic investors have kept the market upfloat.

Investors are of a belief that, sell off and bear markets are a buying opportunity and due to that the markets have been resistant to the FPI sell off till now, but with the continued shaky macroeconomics, plunging earnings and ballooning valuations, how long will DI hold up the markets