*FPI equity sales since Oct now at Rs 2 lakh crore; here’s why experts feel the cycle hasn’t yet peaked – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/stocks/news/fpi-equity-sales-since-oct-now-at-rs-2-lakh-crore-heres-why-experts-feel-the-cycle-hasnt-yet-peaked/articleshow/91809635.cms

Synopsis

With those ultra-loose monetary policies – necessary at the time to prevent economic collapse-now feeding into multi-year high inflation in several countries, central banks the world over, including the US Federal Reserve, are taking swift strides to turn off the easy money tap.

NEW DELHI: One of the defining aspects of the initial years of the COVID-19 pandemic was an unprecedented wave of monetary largesse from central banks the world over, ranging from interest rates being slashed to record lows to humongous liquidity infusions.

With those ultra-loose monetary policies – necessary at the time to prevent economic collapse-now feeding into multi-year high inflation in several countries, central banks the world over, including the US Federal Reserve, are taking swift strides to turn off the easy money tap.

As the world’s largest economy aggressively moves towards a higher interest rate regime while shrinking its balance sheet, a fallout for the Indian stock market is an unprecedented bout of selling pressure from foreign portfolio investors.

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Beginning October 2021, FPIs have sold Indian stocks every single month and the cumulative sales now stand at a massive Rs 2 lakh crores, latest NSDL data showed. Analysts say that the current cycle of FPI sales has outstripped that witnessed during the Global Financial Crisis of 2008.

The factors are many. Along with a structural rise in domestic stock market participation – especially retail investment-the deluge of liquidity unleashed by the US Federal Reserve sent the Sensex and the Nifty surging around 70 per cent in 2020-21, followed by a near-20-per cent rise in the next year.

That liquidity-fuelled stock buying binge is now well and truly over, with the Fed deciding to well and truly act tough on inflation by executing sharp rate hikes. Higher interest rates in advanced economies such as the US typically lead to global funds exiting emerging market economies.

FED HIKES

After having hiked interest rates by a total of 75 basis points so far in 2022, the US Fed is widely expected to raise rates by 50 bps each at its meetings in June and July.

Consequently, even after offloading 74 per cent of the Rs 2.7 lakh crore worth of stocks they purchased in 2019 and 2020 in just the last eight months, FPIs may not be in any hurry to reverse their sales.

“As long as there is expectation that the US Fed and other central banks will keep raising rates, risk appetite generally will remain low and that will result in some unwinding of carry trade and also profit taking after a very big up run over the last two years since March 2020,” Deepak Jasani, Head of Research – Retail, at

HDFC

NSE 2.25 % Securities said.

“A lot of people are still sitting on profits so that periodic profit taking will continue will we get an indication from the Fed that they are done with raising interest rates and that could be some couple of months away.”

While domestic investors have largely stepped in and absorbed the selling pressure from FPIs, there are limits to local buying enthusiasm amid an environment of higher domestic capital – the RBI too has embarked on a rate hike cycle – and mixed corporate earnings.

According to a recent report by

SBI

NSE 3.26 % Mutual Fund, domestic market players picked up $13.7 billion of stocks in Jan-March while FPIs sold $15 billion.

“FPIs are smart to space out their selling and sell only as much as the market is able to absorb without any dramatic fall in prices or valuation,” Jasani said.

“Markets may continue to erode despite the domestic investors support but they may not crack unless we have a big event globally or locally.”

The Fed’s tightening plans have also soured FPIs’ appetite for Indian stocks by leading to a depreciating rupee.

With the US dollar index touching near-20-year highs earlier this month, emerging market currencies such as the rupee have taken a beating. A weaker rupee erodes FPIs’ returns from Indian assets.

The Indian unit, which touched a record low of 77.7850/$1 on May 17, has lost close to 4 per cent versus the US dollar so far in 2022.

VALUATIONS

While Indian stock markets have seen a realignment of valuations after a recent selloff, there are still concerns about how costly they may be after the record gains of the previous two years, analysts said.

Based on the advance nominal GDP estimate for the previous financial year, at present, market capitalization-to-GDP ratio clocks in at 107. A value above 100 on the market cap-to-GDP ratio, also known as the Buffett Indicator, is deemed expensive.

It must be noted though, that the level for India has come off from April high of 116.

The Nifty50 now trades at a 12-month forward PE ratio of 17.5 times, above the pre-Covid five-year average of 16.9 times.

“They have been selling of course because the valuations of equities were very much on the high side and the economy was expected to slow down,” Vinod Nair, Head of Research at

Geojit Financial Services

NSE -0.30 % said.

Nair feels that the pace of selling pressure could now cool off, even as the global phenomenon of liquidity withdrawal would keep FPI appetite for Indian stocks at bay.

“The Rs 2 lakh crore worth of selling may be the peak that we have seen but there is still some concern because the overall liquidity support in the global market was the highest till date, so we cannot say that the selling is over. At least over the next one year, the amount of liquidity support the central banks were extending will revert.”

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