Explained | Why are FPIs dumping Indian stocks? 

What has led to the sell-off by foreign portfolio investors? Does it affect the ongoing economic recovery?

The story so far: Foreign portfolio investors (FPIs) have been on a selling spree in India. May figures of about ₹44,000 crore formed the highest monthly quantum of sell-off since March 2020 when India announced a nationwide lockdown. Last month was also the eighth on the trot that FPIs had sold net of their assets — i.e., sold more than they had purchased. Their selling actions have triggered a significant decline in benchmark indices resulting in a drop in market capitalisation of companies.

Foreign portfolio investors are those that invest funds in markets outside of their home turf. Their investments typically include equities, bonds and mutual funds. They are generally not active shareholders and do not exert any control over the companies whose shares they hold. The passive nature of their investment also allows them to enter or exit a stock at will and with ease.

Promise of attractive returns on the back of economic growth draws investors including FPIs into a country’s markets. For example, as per data from the National Securities Depositories Ltd. (NDSL), FPIs brought in about ₹3,682 crore in 2002. This grew to ₹1.79 lakh crore crore in 2010. This correlates with the concurrent expansion of economic output in that period, despite the 2008 global financial crisis which saw FPI sell-offs in that time-frame in the country. The year 2017 saw FPI inflows exceed ₹2 lakh crore.

Likewise, FPIs withdrew ₹1.18 lakh crore in March 2020 alone — the month when India announced a nationwide lockdown, triggering concerns around economic growth. In tandem, benchmark stock index Sensex fell from 42,270 in February 2020 to 25,630 in March 2020.

FPIs also show keenness to invest in bonds when there is a favourable differential between the real interest rates on offer in the country they aim to invest in, and other markets, but more specifically, compared with the largest economy in the world, the U.S.

FPIs sold assets worth ₹44,000 crore in May 2022. This is the second highest sell-off in a month since 1993, after March 2020.

Post-pandemic, recovery in the Indian economy has been uneven. The second wave of the COVID-19 pandemic in 2021 devastated lives and livelihoods. The economy stuttered again when a third, albeit less severe, wave saw the spread of the Omicron variant early this year. Add to this the return of pent-up demand in economies worldwide as the pandemic subsided. The pace of recovery caught suppliers off guard, contributing to supply-side shortages.