Hot money loses steam: FPI inflows into stocks dip below $3 bn

A favourite of foreign investors for many years, Indian equities seem to have lost the plot this year as the net inflows of the so-called 'hot money' or foreign portfolio investments dipped below USD 3 billion.

This marks a sharp decline from an average USD 20 billion invested by the Foreign Portfolio Investors (FPIs) into Indian stocks in each of the last three years.

In contrast, the debt market kept overseas institutional investors captivated with its relatively steadier return promise and attracted net inflows in the excess of Rs 50,000 crore (well above USD 8 billion) this year.

With a couple of weeks still left before curtains are drawn on 2015, the experts believe the final tally for the equities may be even worse as foreign investors have lately been on a selling spree.

This can make 2015 the worst year for Indian equities in terms of the overseas inflows since 2011, when FPIs pulled out Rs 2,714 crore from the stock markets. Nonetheless, going by the current trend, it is likely that 2015 would be remembered as the fourth consecutive year of net FPI inflows into stocks.

Fears of a global slowdown and an imminent interest rate hike by the US Federal Reserve have spooked foreign investors away from riskier assets, while the delay in implementation of major economic reforms could also have made the Indian markets less attractive for them, analysts said.

"FPIs have been pulling out money in 2015 on account of a double impact with the markets consolidating and the US dollar gaining strength, thereby a higher negative portfolio," investment planning platform 5nance.com Founder and CEO Dinesh Rohira said.

Echoing similar views, Geojit BNP Paribas Research Head Alex Mathew said: "A slowdown in FPI investments is mainly on account of slew of global and domestic factors like concerns over the rate hike by the US Federal Reserve and subdued quarterly numbers (of corporate earnings) among others."

However, analysts believe a reversal of trend in the year ahead on expectation of a conducive investment environment. "The year 2016 is expected to see a reversal with the FPIs coming back as the currency and market conditions both are expected to be conducive for their investments with a net average returns of over 15 per cent," Rohira said.

Mathew also said the next year will be better than 2015 in terms of FPIs investment in capital markets, especially equities. Another analyst V Srivatsa, EVP and Fund Manager at UTI MF said: "Overseas investment in Indian market will depend on their sentiment for the emerging markets. Besides, reform measures like GST will have a positive impact on the inflow."

As the year draws to an end, FPIs purchased stocks worth Rs 11.22 lakh crore but sold shares to the tune of Rs 11.07 lakh crore, resulting into net inflows of Rs 15,136 crore (USD 2.8 billion) for 2015.

Despite poorer inflows this year, FPIs' cumulative net investments into the Indian equity markets, since being allowed over two decades ago in November 1992, has now reached close to Rs 8 lakh crore.

The cumulative figure for debt securities has also grown to Rs 3.15 lakh crore -- taking the total for both debt and equities to Rs 11.13 lakh crore (USD 224 billion).

The capital poured in by the FPIs is often been called 'hot money' because of its unpredictability, but these overseas entities have still been among the most important drivers of Indian stock markets.

The experts are confident about an uptrend in investment in the stock markets next year.
In 2014, foreign investors had made a staggering investment of over Rs 97,000 crore into equities. Besides, FPIs made a net infusion of Rs 1.13 lakh crore and Rs 1.28 lakh crore into equity markets during 2013 and 2012, respectively. Prior to that, FPIs had pulled out money from the stock markets in 2011.

During the last decade, FPIs had witnessed an outflows only in 2011 and 2008. In terms of sectors, FPIs remained highly overweight on financial and continued to be underweight on IT in the total portfolio.

FPIs had begun the year on a positive note and pumped in over Rs 48,000 in just four months till April in equities owing to several factors like positive investor sentiment driven by several reform measures announced by the government, expectations of more announcements in the Union Budget, easing inflation and rate cuts by RBI.

Thereafter, overseas investors had pulled out funds in the succeeding two months (May-June) on worries over imposition of 20 per cent minimum alternate tax on capital gains by them and rise in global crude oil prices. However, they had reversed the outflow trend in July and had invested capital in the stock market.

FPIs, once again, turned net sellers of equities in August and offloaded bagful of stocks and momentum continued in September too on fears of an economic slowdown in China. In fact, FPIs had pulled out Rs 17,524 crore in August, making it the highest net outflow by FPIs in a single month since 1997. In October, the Indian stock markets saw positive flows from FPIs, while again they took out money in November and the sell-off continued in this month too.