Covid-19, US yields, dollar to weigh on
equity flows in the near term.
After the record-breaking
equity inflows in the last financial year (FY21), foreign portfolio investors
(FPI) are scaling back their exposure to India amid the rising US bond yields
and worsening coronavirus crisis.
So far this month, FPIs
have sold shares worth $1.09 billion.
If the pace of
outflows continues, April could record the highest monthly outflows since March
2020.
In the interim 12 months,
the domestic equity markets have seen monthly outflows only on two occasions –
April 2020 ($535 million) and September 2020 ($767 million).
Since mid-February, most
emerging markets (EMs) have seen turbulent capital flows amid a spike in US
bond yields and a stronger dollar.
In recent
weeks, the US treasury yields have stabilised and the dollar rally has taken a
pause.
This has helped in easing
the pressure on EM currencies and bonds.
However, the surge in
Covid-19 cases has provided no respite to India.
FPIs have been net-sellers
in the previous six trading sessions, the market data shows.
The record daily Covid
tally has sparked concerns about India’s nascent economic and earnings
recovery.
The selling by overseas
investors weighed on the performance of the domestic markets.
The benchmark Sensex has
come off 8.1 per cent from its all-time high, made on February 15, while the
rupee has weakened nearly 4 per cent against the dollar.
The first quarter of 2021
saw FPI inflows of more than Rs 56,000 crore amid forecasts of a steady
deprecation in the US dollar.
However, a strong US
economic recovery and sluggish growth in the developing markets have led to the
strengthening of the greenback against most EM currencies.
This has also led to some
unwinding of the EM carry trade.
Experts believe there will
be pressure on flows in the near term.
“Over the next few months, the
US dollar is expected to do relatively better due to the strong US economic
recovery and higher bond yields.
"So, that is indeed a
headwind for some of the momentum-oriented FPI inflows,” said Pratik Gupta,
CEO& co-head, Kotak Institutional Equities.
Earlier this month, the
rupee ended at 75.06, its lowest close since July 2020.
While the currency has
stabilised somewhat, the forecasts are that it will fall further.
“The Indian rupee has been
among Asia’s worst-performing currencies in April.
"The RBI will have
limited room to intervene and support the rupee.
"We
expect the rupee to remain under pressure this year, with a bias to depreciate
further from current levels,” said Arun Srinivasan, head of fixed income at
ICICI Prudential Life Insurance.
Abhishek Goenka, managing
director at IFA Global, expects the rupee to depreciate gradually towards
77-77.50 a dollar by the year-end.
The weak outlook for the
rupee will keep a lid on foreign flows this year, say experts.