Sustained capital market outflows have confused stock markets and led to a weakening of the rupiah amid rising inflation across the globe. As the US Federal Reserve prepares to raise rates further, outflows are expected to continue, which will put pressure on the Indian currency.
Why is capital flowing out?
Foreign portfolio investors (REITs), which hold around 19.5% of the market capitalization, have withdrawn Rs 42,000 crore so far in June, bringing total outflows to Rs 260,000 crore (Rs 33 billion). dollars) since October 2021. The REIT sell-off is being attributed to monetary policy tightening by the US Fed, which has embarked on a rate-hike spree to control inflation. Other central banks, including in Britain and the eurozone, are following suit.
“Relatively high valuations in India, rising bond yields in the United States, appreciation of the dollar and concerns about the possibility of a recession in the United States triggered by aggressive tightening are factors behind the withdrawal from REITs,” said VK Vijayakumar, chief investment strategist at Geojit Financial. Services.
When the global economy took a hit, central banks around the world cut interest rates and announced liberal monetary policies. While this helped economies recover and led to higher consumption, excess liquidity in the financial system led to inflation. This is why central banks have started to tighten monetary policies and raise interest rates. In India, inflation hit an eight-year high of 7.79% in April, prompting the RBI to raise the repo rate by 90 basis points to 4.90%.
What impact does this have on the markets and the rupee?
The pullback is dampening sentiment in equity and currency markets. The benchmark Sensex plunged 16% from the October 2021 high of 62,245.43 to 52,266.72 on June 23. The impact of the sale of REITs on the markets is visible, with an increase in volatility and a drop in share prices. While these sales by foreign investors have been absorbed by domestic investors led by domestic institutional investors (DIIs) to a large extent so far, fund flows from retail investors and domestic institutions have recently slow motion. Between November 2021 and June 2022, DIIs invested a net amount of Rs 2,84,488 crore (over $37 billion) in Indian stocks, providing some counterbalance. Experts say, however, that retail flow and DII inflow are weakening now, and markets could weaken further if REIT outflows continue.
India’s foreign exchange reserves fell by $46 billion over the past nine months to $596.45 billion as of June 10, 2022, mainly due to dollar appreciation and REIT withdrawals. The rupee plunged 7.3% to an all-time low of 78.30/32 against the dollar. The depreciation of the rupee is never good for the stock market as a whole, and the withdrawal of foreign investors can lead to lower stocks and mutual fund investments. Foreign investors generally stay away when the currency is falling and interest rates are rising in the United States and in developed markets.
Analysts said a weaker rupee against the dollar is keeping import bills higher, pushing inflation even higher than it is now. Higher inflation is detrimental to the whole market. If the Rupee does not strengthen, FPI outflows will continue, which is another negative. A strong dollar is good for export-oriented businesses, but bad for import-oriented industries such as oil, gas, and chemicals. With the falling rupiah, imports of oil and other imported components will become more expensive, which will further lead to higher inflation. Travelers and students studying abroad will have to shell out more rupees to buy dollars from banks. People are directly affected by the falling rupee as fuel prices soar.
How do REITs work?
In times of global uncertainty, foreign investors are embracing risk-free trading, meaning they are moving money from risky assets such as stocks and adding more bonds and gold. When interest rates rise in the United States and other advanced economies, they pull money out of emerging markets like India and invest in bonds in their home markets. The US 10-year bond has risen from a low of 0.54% in July 2020 to over 3.30% today.
“The global investment scenario has been plagued by risky trade since October 2021, as central bankers hinted at policy tightening as inflation shifted from a ‘transitional’ nature to a headache at This helped bond trading globally as yields began to look attractive, prompting investors to allocate a higher share to fixed income securities as an asset class,” a report said. Axis Mutual Fund. Rising global yields are not good news for Indian stocks and investors. The sale of the REIT has caused the valuation of the top 500 companies to decline, with some of them losing 15 to 20 % in the last 9 months.
How big are they in India?
REITs are the largest non-developer shareholders in the Indian market and their investment decisions have a huge bearing on stock prices and the general direction of the market. REIT holdings (by value) in NSE-listed companies stood at Rs 51.99 lakh crore as of March 31, 2022, down 3.36% from Rs 53.80 lakh crore as of December 31 2021, due to sustained sales since October 2021.
REITs hold large stakes in private banks, technology companies and large caps like Reliance Industries. The United States accounts for a large share of REIT investments at Rs 17.57 lakh crore in May 2022, followed by Mauritius Rs 5.24 lakh crore, Singapore Rs 4.25 lakh crore and Luxembourg Rs 3.58 lakh crore, according to data available from the National Securities Depository Ltd. (NSDL).
Will the rupee fall further?
The rupiah continued to depreciate beyond the general expectation of a gradual weakening despite the RBI selling dollars from its forex pool to stabilize the currency. At current spot dollar and rupee levels, year-end futures prices have exceeded their projection of 79 to the dollar by the end of 2022, according to a report from Bank of America Securities. “We believe that the risks are still tilted towards further depreciation of the rupiah, as the fundamental outlook has deteriorated further, mainly due to the rise in oil and other commodities. We have adjusted our projection upwards from 79 currently to 81 per dollar by the end of 2022. We, however, see the RBI’s strong reserves as a mitigating factor against tail risks,” he said.
Rising US inflation, rising rate concerns and falling stock market are weighing on Rupee sentiment. On the other hand, further rate hikes by the Fed will lead to larger outflows from foreign portfolio investors.
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What should investors do?
If REITs continue to exit and there is a decline in retail and DII participation, which market participants have noticed recently, equity markets could experience another correction. However, while other markets may correct further from current levels, experts say investors should stick to their existing investments in domestic equities.
“While weakness is likely to continue in the markets, investors should not look to redeem their holdings in the current market. They should stick with them as a rebound in economic activity, which is underway and could s ‘accelerate over the next couple of years, would lead to market recovery going forward and therefore gains for investors,” the CIO said with a wealth management firm. He further said investors should not opt for lump sum investments and should instead continue with the systematic investment plan mode.