Foreign Portfolio Investors:
Foreign portfolio investors have pulled out Rs 42,000 crore this month amid rising inflation and monetary policy tightening in the US.
- FPI involves an investor buying foreign financial assets such as fixed deposits, stocks, and mutual funds.
- All the investments are passively held by the investors.
- Investors see relatively high valuations in India, rising bond yields in the US, an appreciating dollar and concerns regarding the possibility of a recession in the US triggered by a rate hike in the US as the possible reasons for their pullout.
- In India, inflation surged to an eight-year high of 7.79% in April, prompting the RBI to hike the repo rate by 90 basis points to 4.90%.
- India’s foreign exchange reserves have fallen $46 billion in the last nine months to $596.45 billion as of June 2022, mainly due to the dollar appreciation and FPI withdrawals.
- Rupee depreciation may lead to higher import bills: A strong dollar (and weaker rupee) is good for export-oriented companies but bad for import-oriented industries such as oil, gas and chemicals.
- With the dip in the rupee, oil imports and other imported components will get costlier, which will further lead to higher inflation.
- FII moves money from risky assets such as equities and add more bonds and gold. When interest rates rise in the US and other advanced economies, they withdraw money from emerging markets such as India and invest in the bonds in their domestic markets. The 10-year US bond has shot up from a low of 0.54% in July 2020 to over 3.30% now.
- FPIs are the largest non-promoter shareholders in the Indian market and their investment decisions have a huge bearing on the stock prices and overall direction of the market.
- The rupee has continued to depreciate despite the RBI selling dollars from its forex reserve to stabilise the currency.
- The rise in US inflation, rate hike worries and the stock market fall may drive further weakening of the rupee in India.