Foreign investors pulled out more than $3 billion of the so-called ‘hot money’ from the Indian capital markets in 2016, making it the worst period in last eight years in terms of foreign investments.
Surprisingly, it is the debt instruments that have taken the biggest hit, after remaining a preferred investment avenue for foreign funds in recent years, while equities continued to attract net inflows but not enough to compensate the huge outflows from the bond market. Experts believe that any respite from such a sell-off is likely only in the second half of the new year 2017.
Foreign Portfolio Investors (FPIs) have purchased stocks worth about Rs 20,566 crore in 2016, but sold bonds to the tune of more than Rs 43,646 crore, resulting in net outflows of Rs 23,080 ($3.2 billion), according to depositories data. The overall net outflow has made 2016 the worst year for Indian capital markets in terms of overseas investment since 2008, when FPIs had pulled out a massive Rs 41,215 crore in the wake of the global financial crisis.
The inflationary tendencies on the back of rising bond yields in the developed world bond market coupled with a resilient recovery in crude have led to profit booking.
Dollar strength and expectations of rate hike by the US Federal Reserve, the surprising US presidential outcome and the demonetisation drive, which created domestic cash crunch, sparked intense selling pressure in the capital markets, experts believe.
“Massive pullout of FPI investment, particularly in debt, happened during the last two months, particularly after the (Donald) Trump victory. This FPI pullout is an emerging market phenomenon, not an Indian phenomenon. The selling in debt is due to the market expectation of sustained Federal rate hikes starting December 2016,” Geojit BNP Paribas’ Chief Investment Strategist V K Vijayakumar said.
Echoing similar views, Dinesh Rohira, CEO at 5nance.com, said: “Capital outflows started in Indian markets from October over the uncertainty of US election results. This event was soon followed by the demonetisation drive that created a domestic cash crunch and sparked intense selling pressure in the capital markets. This will result in slower production and domestic consumption at least for a quarter.”
Going into 2017, Pankaj Pandey, Head of Retail Research at ICICI Direct, believes that FPIs’ allocation may remain tepid.
“We do not see a major turnaround for the next two quarters and so, the first half of 2017 will remain subdued in terms of foreign capital flow. The uncertainties are expected to settle down and reforms will start counting in for the economy in the second half of 2017, accelerating the growth momentum,” Rohira said.
Equity MF inflows hit 18-month high in Dec
Equity mutual funds saw an inflow of more than Rs 10,000 crore in December, making it the highest in 18 months, underpinned by investor optimism. This also marks the ninth straight month of positive inflow in equity schemes. Prior to that, such funds had witnessed a pullout of Rs 1,370 crore in March.
Market experts attributed the inflow to positive climate and optimistic environment in both equity and debt segments.
Also, monthly net contributions through SIP (systematic investment plans) led to higher positive net inflows in equity markets, they added.
"The running SIP volume of about Rs 3,900 crore a month is a major support for fresh flows in the markets," Bajaj Capital National Head Mutual Funds Anjaneya Gautam said.
SIP is an investment vehicle that allows investors to invest in small amounts periodically instead of lumpsums. The frequency of investment is usually weekly, monthly or quarterly.
According to data from Association of Mutual Funds in India (Amfi), equity funds, which also include equity-linked saving schemes (ELSS), registered a net inflow of Rs 10,103 crore last month.
This is the highest net inflow since June 2015, when equity MFs racked up an inflow of Rs 12,273 crore. In November, the net inflow stood at Rs 9,079 crore.
With the latest inflow, total mobilisation in equity schemes has reached close to Rs 51,000 crore in April-December of the current financial year.
The robust inflow has pushed up assets under management (AUM) of equity MFs to Rs 4.7 lakh crore at the end of December, from Rs 4 lakh crore in April-end.
"Despite market being weak since November 2016, equity AUM has recovered due to fresh investments by investors. As we still have three months to end the current financial year, we may close the year with the highest-ever equity and overall AUM in mutual funds," Gautam said.