Foreign outflows from emerging markets have accelerated since the onset of the Russia-Ukraine conflict. The equity outflows in India this year are in sharp contrast to the trend of the past two years. Year to date, the outflows from India, the fourth such instance in two decades, are the highest ever in terms of the amount and rate, according to Societe Generale.
“Year-to-date net foreign outflows of $26 bn from Indian equities are close to twice those seen during the peak of the global financial crisis in 2009. Even after adjusting for market cap, this is among the highest ever outflow rates, said Societe Generale in a note on Thursday on Asia equity strategy.
The relentless selling by foreigners has pushed foreign ownership to less than 18%, a more than a five-year low. The three reasons of FIIs pulling out of India, in Societe Generale’s view are first, after a strong rebound, growth momentum has weakened a lot. The analyst earnings upgrades to downgrades ratio is close to 1:3, the opposite of what it was a year back.
Second, the depreciation pressure on the INR has greatly increased due to higher oil prices. Its EM strategy team expects the rupee to depreciate by a further 3% to 80/USD by the end of the year.
Third, and most importantly, India stock markets have been relatively slow to correct due to strong domestic inflows partially offsetting the pressure from foreign outflows, the global brokerage said.
Meanwhile, as per the report, Indonesia and Thailand have seen minor equity foreign inflows in 2022 as compared to other Asian markets like India, Korea and Taiwan which have seen outflows since the beginning of the year. “Foreigners were late to come to Indonesia, yet cumulative flows are highest there,” Societe Generale added.
Aggressive rate hike by the US Federal Reserve, coupled with elevated inflation and high valuation of equities continued to keep foreign investors at bay from the Indian stock market as they pulled out ₹31,430 crore in June so far. With this, net outflow by Foreign Portfolio Investors (FPIs) from equities reached ₹1.98 lakh crore so far in 2022, data with depositories showed.