Debt and equity markets: Foreign investment outflow in May hits 18-month high

Indian Express,  Sandeep Singh , | New Delhi  May 28, 2018 

Following sustained outflow of funds from Indian debt and equity markets on account of rise in treasury yields in the US, India is set to witness the highest outflow of funds by Foreign Portfolio Investors (FPIs) in May, since November 2016, when the government announced demonetisation of Rs 500 and Rs 1,000 notes.

With four trading days still to go in this month, as on May 25, FPI’s have pulled out a net of Rs 26,768 crore from the Indian markets (Rs 18,949 crore from the debt market and Rs 7,819 crore from the equity market). In November 2016, FPIs had pulled out a net of Rs 39,935 crore from the market and also pulled out Rs 27,111 crore worth of investments in the following month in December 2016. Between April and May 2018, FPIs have pulled out an aggregate of Rs 42,330 crore from the Indian markets.

The significant rise in outflow of funds over the last six weeks along with sustained rise in crude oil prices had an impact on the exchange rate as the rupee weakened to a level of 68.4 against the dollar on Wednesday before it recovered to close at 67.73 on Friday, following a 3 per cent drop in brent crude prices.

A report released by Care Ratings on Thursday pointed that while India received higher FPI inflows in 2017-18 on account of improved investor sentiment following better economic fundamentals and implementation of several reform measures such as GST, bankruptcy code and measures to address the stressed assets of banks, there may be some pressure this year. It said, “The economy is likely to witness higher FPI inflows on account of RBIs decision to increase FPI limits in April 2018, however, the rising US yields, a rate hike by the US Federal Reserve will pose a threat for FPI flows. CARE ratings expect that FPI inflows will amount to $20-25 billion in 2018-19 with a lower bias.” In FY18, it stood at $26.8 billion.

If the current FPI outflow trend continues and crude oil prices continue to rise, market experts say that rupee may continue to remain weak and the current account deficit could rise to up to 2.5 per cent of GDP in FY19.

“Going forward, factors including FPI flows, direction of oil prices, global political developments and strength in dollar will determine the final direction of the rupee. In case of higher depreciation, the RBI might step in to guard the further weakness in the currency by intervening in the market. We expect the rupee to hover around Rs. 67-5-68 per dollar for the entire 2018-19 year,” said Madan Sabnavis, chief economist, Care Ratings.


However, as the Brent Crude prices fell on Friday after Saudi Arabia and Russia said they were ready to ease supply curbs that have pushed prices to their highest since 2014, the rupee rose 0.83 per cent against the dollar and equity markets also gained around 0.8 per cent.


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