India-focussed offshore funds, ETFs log $1.55 billion outflow in Q1

India-focused offshore funds and exchange-traded funds (ETFs) witnessed a net outflow of $1.55 billion in three months ended June 2021, making it the 13th consecutive quarter of withdrawal, according to a Morningstar report released on Monday.

This was significantly higher than the net outflows of $376 million registered during the quarter ended March 2021.

India-focused offshore funds and India-focused ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity markets.

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During the quarter ended June 2021, the offshore fund segment registered net outflows to the tune of $1.7 billion, higher than $1.1 billion seen in the preceding quarter, the report mentioned.

While for some time now, the quantum of net outflows from the category was on a declining trend, the surge in the pace of net outflows during the June quarter has been a dampener.

Interestingly, the segment received net inflows of $33.2 million in the month of March, which was the first monthly net inflow for the segment after 37 consecutive months of net outflows.

However, this could not be sustained, as the scenario turned adverse with the onset of the second wave of Covid-19 in the country.

A positive indicator has been net inflows for the offshore ETF segment for the third quarter in a row. During the quarter ended June 2021, the segment received a net inflow of $153 million, which was lower than the net inflow of $767 million seen during the March quarter and $882 million during the December quarter.

Flows into offshore funds are generally considered to be long-term in nature, whereas flows into offshore ETFs indicate predominantly short-term investment.

The India-focused offshore fund and ETF category have been witnessing consistent net outflows since February 2018. The intensity had reached its peak in the March 2020 quarter, as almost $5 billion left its coffers. This was the highest quarterly net outflow that the category has ever witnessed.

Although net outflows continued during the June, September and December quarters of 2020 as well as March 2021 quarter, their intensity moderated considerably.

However, with the second wave of Covid-19 hitting Indian shores, the pace of net outflows once again shot up, and rather sharply, in India-focused offshore funds and ETFs category, the report noted.

"During the quarter under review, the category experienced net outflows of $1.55 billion, which was markedly higher than the net outflows of $376 million recorded during the quarter ended March 2021, and the net outflows of $986 million during the December 2020 quarter," it added.

From February 2018 until June 2021, India-focused offshore funds experienced significantly higher net outflows of $20.8 billion compared with net outflows of $2.6 billion from the India-focused offshore ETF segment.

The higher net outflows from India-focused offshore funds indicate that foreign investors with long-term investment horizons have been adopting a cautious stance toward India, the report stated.

"Although this is concerning, it is not entirely unexpected given the country's Covid-19 situation, current economic landscape, and uncertainty over how soon India will be back on a growth trajectory," it said.

It further said that Indian equities continue to attract foreign investments through direct equity as well as the ETF route.

The severity of the second wave of the pandemic has reduced substantially.

However, future trend of the flows in the India-focused offshore fund and ETF category will revolve around how India fares in containing future Covid-19 cases, as well as how quickly vaccinations can be administered, and how it deals with the risk of a potential third wave of the pandemic, the report noted.

Moreover, there are improvements on the economic front, but foreign investors would be keen to see more concrete and sustainable signs of economic growth before betting on India, it added.

Despite net outflows, the surge in the equity markets led to an increase in the assets of India-focused offshore funds and ETFs. During the quarter ended June 2021, their asset base grew by 4 per cent to $46.3 billion compared with $44.5 billion recorded in the March quarter.