For the month of March 2020, FPIs sold Rs.124,000 crore in the Indian markets; in equity and debt combined. This is the largest monthly selling by FPIs since they were first allowed into India in the year 1992. What exactly triggered this aggressive selling by FPIs?
Lockdowns are a time for risk-off
A lockdown is never a great idea. But it can be a lot more troubling for an economy like India which largely gets foreign flows due to its growth promise. The lockdown means multiple things for a country like India. Firstly, it means that the GDP growth will slow down. Secondly, it also means that consumer power will be under stress. Thirdly, it implies that we could be in for a series of consumer loan defaults. That is not a great signal for FPIs to invest in India.
Financials under stress
Of all the sectors, the financials matter the most to the markets due to their 41% weightage in the Nifty. With a series of bank downgrades and the freeze on banks like Yes Bank, the FPIs have now begun to rethink their banking exposure in India. GDP growth has been cut to 2% for the fiscal year 2021. That hints at limited visibility for the profit growth of Indian corporates. FPIs do expect that from valuations anticipating growth, it could now be a case of weak growth driving valuations lower. Banks and financials could see big stress.
MSCI backs out
One of the big hopes for the FPIs and for the Indian markets was the MSCI upgrading its India weightage by 100 bps. That would have resulted in inflows to the tune of nearly $15 billion into India. It would have been a big boost as most sovereign funds, index funds, and index ETFs would simply make passive allocations to India. The decision by MSCI to put off the upgrade puts FPIs in a spot as many had accumulated likely gainers. The unwinding is putting a strain on the markets and on FPI numbers. MSCI has a reason for putting off the decision as they don’t expect flows in proportion to their upgrade. That could dilute the value of the MSCI benchmark.
Rates and the rupee
FPIs not only sold Rs.65,000 crore in equity but they also sold Rs.59,000 crore in debt in March 2020. It was this combination that spooked markets. The debt selling was largely driven by falling rates globally and a weak rupee. While the Indian 10-year bonds still hold their 450 bps rate spread over the US, it is the exchange rate that is the worry. The rupee has already weakened from 73/$ to 76/$ and the RBI is likely to be a lot more calibrated in its dollar intervention. Most FPIs prefer the safety of the US markets as the currency strength will hold them in good stead. This amalgam of factors explains the record selling in equity and debt by the FPIs.