India's net foreign fund outflow highest ever

Wednesday 22nd June 2022 06:30 EDT

Net foreign fund outflow from India in 2022 has crossed the £20 billion, the biggest annual figure ever and more than double the previous high of £8.09 billion recorded in 2018.

Of the total, over 90% which comes to £19 billion, was because of selling by foreign portfolio investors (FPIs) in the stock market, data from CDSL showed. Galloping inflation, rising current account deficit, a weakening currency and the decision by the US Fed to raise rates in the world’s largest economy at a very fast clip have compelled foreign fund managers to take money off risky emerging market assets including from India, analysts and brokers said.

June is the ninth consecutive month that FPIs have been net sellers in India, taking the total to nearly £25 billion during this period. So far this month, in just 15 days, FPIs have net sold stocks worth nearly £2.5 billion, official data showed.
According to a leading debt fund manager, the FPI outflow could continue for a few more months, at least till the time there is clarity about how far the US Fed will move to tighten liquidity in the US.

To tame inflation, US Fed chairman Jerome Powell has indicated to raise rates very quickly and aggressively. The Fed has also said that it would reduce its balance sheet size at the rate of $95 billion per month. Since the Covid pandemic started in early 2020, the US central bank had been buying bonds from the market and in turn infusing funds into the system. Now given that retail inflation in the US is at a 41-year high, the Fed, along with raising rates, has also stopped buying bonds. In addition, starting this month it has started selling bonds it’s already holding.

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