After two years of good foreign portfolio investments (FPI) inflows, Indian markets are now witnessing a reversal in trend as there have been net foreign outflows of $13.7 billion so far this year as against net inflows of $15.3 a year ago, a report has shown. FPI outflows have been one of the factors behind the recent rout in the rupee market; however, whether rupee affected FPI flows remains “ambiguous”, Care Ratings said in the report.
“The flow of foreign portfolio investments (FPI) to the Indian markets has witnessed a reversal in the current fiscal year, after 2 years of high inflows,” the report said, adding that there were several factors that led to FPI outflow — from rising crude prices to widening current account deficit.
Going forward, Care Ratings warns of increase in FPI outflows. “FPI flows would continue to be volatile in the coming months,” it said. The rating agency mainly pointed out to seven key factors that could increase FPI outflows: RBI repo rate decision, US Fed rate hike, rupee value, inflation, trade deficit, global liquidity, trade disputes.
On the recent decision by the Reserve Bank of India (RBI) to keep repo rate on hold at 6.5%, Care said, that it would also not diminish the absolute differential in returns for FPI between the US and domestic bonds.
Several domestic factors such as weakness in currency, risks of inflation, the trade deficit would also weigh in on the inflow. Besides, global factors such as US interest rate hikes, tightening global liquidity and escalating trade disputes would also be crucial in directing the flow of FPIs.
Source: Financial Express