Jittery FPIs in pullout mode as India grapples deadly virus resurgence

Foreign portfolio investors (FPI) continued to pull out investments from the Indian equities during the first week of May as Asia’s third largest economy battled a deadly second wave outbreak of Covid-19, rendering an unexpected blow to its hopes of a recovery.

During the trading sessions of May 3-7, FPIs pulled out net investments worth Rs59.36 billion from equities as investor sentiments were rattled on the back of the deepened Covid crisis in the world’s second populous nation. Lockdowns and travel restrictions across states also have blighted the prospects of a recovery that was widely expected in the medium term, analysts said.

Market watchers said the selling in May continues after FPIs withdrew net investments of Rs96.59 billion in April. The bearish trend last month came after incessant buying in the preceding six months.

“If fears of Covid-19 persist among overseas investors, then further redemptions cannot be ruled out,” Himanshu Srivastava, associate director and manager research, Morningstar India, was quoted as saying by PTI.

“The nervousness among FPIs with regards to the second wave of coronavirus pandemic in India was visible in the flow numbers for this week,” Srivastava said.

Before the April’s outflow, FPIs had been infusing money in equities since October. They invested over ₹1.97 trillion in equities during October 2020 to March 2021. This included a net investment of ₹557.41 billion in the first three months of this year.

In fiscal 2020-21, FPIs, which have been the main driver of domestic equities, have pumped in a record $37 billion or Rs 2.75 trillion into the equities, the highest in two decades, according to the data from the National Securities Depository.

The value of FPI holdings in Indian equities reached a record $555 billion in 2020-21, up $105 billion between September 2020 and March 2021, according to the data compiled by Bank of America (BofA) Securities.

“Moreover, the uncertainty over the degree of impact of the second wave of Covid-19 crisis on the economy could continue to keep foreign investors on the sidelines. This can also potentially force FPIs to adopt a wait and watch approach for a relatively longer period of time,” Srivastava said.

Analysts said the pullback by FPIs is proportional to the steep rise in Covid-19 cases in India, parallel lockdowns imposed by states and the consequent slowdown in growth. In addition, a weak currency added to the outflows by FPIs.

They said the focus for FPIs would continue to be on economic numbers and how soon India gain its economic momentum back. Any surprise on that front can dent sentiments further and adversely impact foreign flows.

Analysts at S&P Global Ratings recently slashed India’s economic growth forecast to 9.8 per cent from 11 per cent for the current April 2021-March 2022 fiscal year, joining several others in predicting further headwinds for the country in navigating the pandemic-induced crisis it has been grappling with for more than a year.

The US-based rating agency, which currently has a ‘BBB-’ rating on India with a stable outlook, said the depth of the Indian economy’s deceleration will determine the hit on its sovereign credit profile, suggesting the second Covid wave may derail the budding recovery in the economy and credit conditions.

The Indian government’s fiscal position is already stretched. The general government deficit was about 14 per cent of GDP in fiscal 2021, with net debt stock of just over 90 per cent of GDP.

In March, S&P had made a 11 per cent GDP growth forecast for India for the April 2021-March 2022 fiscal on account of a fast economic reopening and fiscal stimulus.

An International Monetary Fund expert for the Asia Pacific region said the new wave of Covid-19 infections is “worrisome” and threatens the 12.5 per cent growth projection.

Jonathan Otry, the deputy director of the IMF`s Asia Pacific Department, said “the current surge in infections presents a worrisome downside risk revisions” for India which has seen a more sizeable upward revision to 12.5 per cent on account of continued normalisation of its economy and a more growth-friendly fiscal policy. — issacjohn@khaleejtimes.com