FPI return drives market recovery

After sustained selling in domestic markets for several weeks, foreign portfolio investors (FPIs) seem to have returned with buy orders.

FPIs bought stocks worth Rs 312 crore on Wednesday and Rs 2,800 crore on Thursday when the Sensex gained 1,048 points to 57,863.93. The return of FPIs coincided with the US Federal Reserve’s decision to hike key policy rates by 25 basis points to a target range of 0.25 per cent to 0.5 per cent. The markets have witnessed a smart recovery over the last one week and risen 9.5 per cent since it closed at 52,842 on March 7.

The sell-off by FPIs has led to withdrawal of over Rs 225,000 crore from Indian stock markets since October last year with the Russia-Ukraine conflict adding to the nervousness of FPIs which have already priced in interest rate hike by the US Federal Reserve.

The FPI pull-out has hit the rupee with its exchange rate against the dollar falling below the 76 level despite heavy RBI intervention. The rupee recovered to 75.80/81 on Thursday Foreign investors withdrew Rs 41,617 crore in March. This outflow has come after withdrawals of Rs 45,720 crore in February and Rs 41,346 crore in January. With this, FPIs have pulled out Rs 2,25,649 crore (excluding FPI investments in IPOs) since October 1, 2021.

FPI selling was mainly confined to financials and IT since these segments constitute the bulk of assets under the custody of FPIs. FPIs sold IT stocks worth Rs 10,984 crore in February, but in March IT is one of the best performing sectors. However, domestic institutional investors (DIIs), led by LIC, mutual funds and insurance companies, have been stepping up their purchases, absorbing most of the FPI sales. “There is a tug-of-war going on between FPIs and DIIs,” said an analyst. Countering the FPI strategy, DIIs have invested Rs 31,620 crore in March 1-17, adding to their total investments of Rs 161,893 crore since October 2021. DIIs invested a record amount of Rs 42,084 crore in February, their highest monthly investment since they put Rs 55,595 crore in March 2020 when Covid pandemic hit the country.

According to an ICICI Securities report, stock markets were witnessing consistent buying by domestic investors in the face of unprecedented selling by FPIs during rare and extreme fear-inducing events seen over the past few years (Covid pandemic and global brinkmanship due to the Russia-Ukraine conflict).

“This is a clear positive surprise and heralds the structural deepening of domestic savings into equities in India. Such behaviour of aggressive buying during declining stock prices by domestic investors should result in improved long-term outcomes for their portfolios against buying in a high-optimism phase of the market, and thereby setting off a virtuous cycle,” it said.

According to analysts, if Russia-Ukraine talks lead to peace and crude oil prices decline, the market could recover further and FPIs are likely to remain buyers.

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