The capital market plays an essential role in driving an economy’s growth and development. It facilitates the flow of savings from those who have surplus funds to those who need it. Within this financial ecosystem, Foreign Portfolio Investors (FPIs) hold a key position.
Defining Foreign Portfolio Investors
FPIs are investors who inject funds into markets outside their home countries. They invest in various instruments like stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts, and Global Depositary Receipts. FPI has a presence on a country’s capital account and reflects in its Balance of Payments, which measures money transactions from one nation to others in a fiscal year.
Significance of FPI
FPI holds significance through its potential to facilitate access to international credit, enhance liquidity of domestic capital markets, and promote equity market development. It provides investors increased credit reach in foreign geographies, enabling them to generate higher returns on their equity investments.
FPI in India: A Snapshot
In India’s financial structure, FPIs are the largest non-promoter shareholders. Their investment decisions significantly impact stock prices and the overall market direction. Data showed that by the end of March 2022, FPIs held Rs. 51.99 lakh crore in value in companies listed on the National Stock Exchange.
Factors Influencing FPI Moves
Economic growth and US Federal Reserve decisions are two significant factors influencing FPI moves. The promise of attractive returns on the back of economic growth draws investors, including FPIs, to a country’s markets. On the other hand, rate hikes by the Federal Reserve not only affect the US economy, but also shape the macroeconomic outlook of other emerging economies.
Reasons for FPIs Selling India Holdings
Post-pandemic economic recovery patterns, global inflation due to supply side shortages, the Russia-Ukraine conflict, and US Federal Reserve decisions have been significant reasons behind FPIs selling Indian holdings. The uneven recovery in the Indian economy post-pandemic, coupled with concerns about economic growth, led to FPIs withdrawing their assets.
Impact of an FPI Selloff
Local currency, exports and imports, reserves, and other factors are severely impacted during an FPI selloff. When FPIs sell their holdings and repatriate funds back to their home markets, the local currency’s value declines. This situation leads to a domino effect on the economy – a weaker rupee results in more expensive crude oil imports, leading to inflation across the whole economy.
Effect on Reserves and Market
India’s foreign exchange reserves fell by USD46 billion to USD596.45 billion as of June 10, 2022, mainly due to the dollar appreciation and ongoing FPI withdrawals. These events impact stocks and equity mutual fund investments, while higher inflation is detrimental to the overall market.
FPIs play a pivotal role in shaping economies worldwide. Their influence on market trends, local currency stability, and overall economic health cannot be understated. Monitoring FPI movements can provide valuable insights into an economy’s financial health and future trajectories.
