This Article is From Mar 07, 2022

India's Capital Outflows Reflect Deepening Economic Worries

Foreign Portfolio Investors (FPIs) pulled out Rs 17,537 crores from Indian markets in just three trading sessions in March, tracking Ukraine war.

India's Capital Outflows Reflect Deepening Economic Worries

India's Capital Outflows Reflect Deepening Economic Worries

The uncertainty from the intensifying Russia-Ukraine conflict and the West's response in the form of economic sanctions have weighed on foreign portfolio investors (FPIs), who pulled out as much as Rs 17,537 crores from Indian markets in just three trading sessions in March.

The deepening economic worries for Asia's third-largest economy from the Ukraine conflict was reflected across Indian assets, with FPIs selling Rs 14,721 crores from domestic equities, Rs 2,808 crores from the debt market and Rs nine crore from hybrid instruments between March 2 and 4.

This resulted in a total net outflow of Rs 17,537 crores from domestic markets.

"The market sentiments have been impacted globally by the uncertainty triggered by the war and the surge in crude," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, to Press Trust of India.

The week hasn't started well for Indian assets.

Indeed, domestic indices plunged by more than three per cent on Monday as oil prices soared to the highest level in 14 years, and the rupee plunged to a record low amid the worsening Russia-Ukraine crisis.

Investors' wealth tumbled over Rs 5.91 lakh crores early on Monday, tracking a steep decline in equities.

As per a PTI report, Himanshu Srivastava, Associate Director - Manager Research, Morningstar India, said geopolitical tension of such a magnitude doesn't augur well for emerging markets like India concerning foreign flows. 

He said that high valuations of the Indian equity markets, the risk to corporate earnings, and the slow pace of economic growth have been keeping foreign investors at bay from investing substantially in Indian stock markets.

"But the pace of outflows shot up sharply after US Fed decided to unwind stimulus measure and increase interest rates sooner than later. The outflows picked up the pace further due to the war between Russia and Ukraine," added Mr Srivastava.

"FPI flows in the emerging markets in February 2022 was positive, except for India. Indonesia, the Philippines, S.Korea and Thailand witnessed inflows to the tune of $1,220 million, $141 million, $418 million and $1,931 million, respectively," Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities, told PTI.

FPI flows are expected to be volatile in the coming months due to the ongoing Russian invasion of Ukraine and its fallout in the form of sanctions, high inflation and likely increase in interest rates by the US Federal Reserve, he said.

Oil prices soared to above $130, their highest since 2008 on Monday, after a US and European ban on Russian oil imports risk and delays in Iranian talks.

"Crude cost of someone else's war. The Russian invasion of Ukraine and likely lower exports of Russian crude oil will keep crude oil prices elevated for a protracted period," wrote analysts at Kotak Securities in a note to clients. 

"We estimate the Indian economy to incur an additional $70 billion burden - 1.9 per cent of gross domestic product (GDP), versus FY2022 levels at an average crude price of $120 billion per barrel. Also, we see significant upside risks to inflation and downside risks to corporate profits through increased pressure on margins and volumes. High oil prices to pose varied challenges to the Indian economy," they added.