In recent news, the Central Depository Services Limited (CDSL) data indicates a significant slowdown in outflows from the equity and debt market by Foreign Portfolio Investors (FPIs) in April 2020. This is a marked shift from March 2020, when a record net outflow of Rs 1,18,203 crore was witnessed.
Key Aspects of the Investment Shift
FPIs sold a net of Rs 6,883 crore from the equities market, while net holdings from the debt market amounted to worth Rs 12,551 crore in April. Equities are tradable ownership shares in a company, either exchanged directly or over-the-counter, forming the backbone of the stock market. In contrast, the debt market involves trading debt instruments such as government or corporate bonds and mortgages, which mandate fixed payments to holders, usually with interest.
Despite these sell-offs, a net investment of Rs 4,032 crore was channeled into the debt Voluntary Retention Route (VRR) scheme. This scheme grants FPIs the freedom to partake in repo transactions and invest in exchange traded funds that focus on debt instruments.
Effect of Covid-19 on Investment Patterns
Outflows persist due to economic uncertainties spurred by the Covid-19 lockdown, leading to investor caution. Despite India’s successful containment of the Covid-19 spread and the government’s proactive measures to rejuvenate the crumbling economy, market pessimism persists. The relaxation in lockdown and the gradual resumption of economic activities piques foreign investors’ attention.
Aspects of Voluntary Retention Route (VRR) Scheme
The VRR scheme aims to appeal to FPIs for long-term and stable investments into debt markets, promising freedom from regulations applicable to FPIs in debt markets on maintaining a minimum share of their investments for a fixed duration. The scheme stipulates a retention period of three years, with investors to maintain at least 75% of their investments in India.
Understanding V-Shaped Recovery
A V-shaped recovery depicts a severe economic downturn followed by a rapid and sustained recovery. It differs from an L-shaped recovery where the economy endures a slump for extended durations. A breakthrough in medicinal treatment and vaccines against Covid-19 could potentially lead to a V-shaped recovery in markets and the economy.
Explaining Foreign Portfolio Investment
Foreign Portfolio Investment (FPI) involves passively held securities and other financial holdings by foreign investors, without direct ownership and depending on market volatility for liquidity. It forms part of a country’s capital account, reflected in its Balance of Payments (BOP), a measure for money flow between nations over a year.
Investors do not actively manage investments through FPIs and hence do not control the securities or the business. The focus is generating quick returns. FPIs often incur less risk and offer more liquidity than Foreign Direct Investments (FDIs), that involve procuring direct business interests in a foreign company. Appropriately termed ‘hot money’, FPI has a propensity to withdraw at the hint of economic instability.
Importance of FPI and FDI
Both FPI and FDI are crucial sources of funding for most economies. These foreign capitals facilitate infrastructural development, manufacturing, and service hubs and enable investment in productive assets such as machinery and equipment. Consequently, they contribute to economic growth and employment stimulation.