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Retail Investors throng in the market despite FIIs sale spree:

Retail investors have come in a big way: FM Sitharaman on stock market volatility

Finance Minister Nirmala Sitharaman on Tuesday said retail investors seem to act as shock absorbers even when foreign portfolio investors continued to pull away amid volatility in stock market as there has been a very significant increase in retail investor numbers during the pandemic.

“Retail investors have come in a big way that they seem to act like shock absorbers… if FPIs went away, our markets did not really have to show their ups and downs in a very distinct way because small investors in the country have come in a big way,” FM Sitharaman said speaking at an event of the corporate affairs ministry as part of the Azadi ka Amrit Mahotsav.

In March, the Central Depository Services (India) Ltd said the number of active Demat accounts opened with it touched the six crore mark. In recent months, the stock market has been witnessing significant volatility and foreign portfolio investors going on a selling spree amid tightening monetary policy actions to curb rising inflation and geopolitical tensions.

Continuing its heavy selling spree for the eighth consecutive month, foreign investors (FPIs) pulled out nearly ₹40,000 crore from the Indian equity market in May on fears of an aggressive rate hike by US Federal Reserve that dented investor sentiments. US Fed has hiked rates twice this year to battle surging inflation caused by the disruption in supply chain due to the war between Russia and Ukraine.

With this, net outflow by foreign portfolio investors (FPIs) from equities reached at ₹1.69 lakh crore so far in 2022, data with depositories showed. Foreign investors have been taking out money from equities in the last eight months (from October 2021 to May 2022), withdrawing a massive net amount of ₹2.07 lakh crore

 Markets are wobbling  mode:

FPIs selling bias stays even in June. Is there a breather from bears in near term?

In May, FPIs outflow stood at ₹39,993 crore, and the selling aggregated to the tune of ₹17,144 crore in April this year. 

NSDL data shows that, from June 1st to 3rd, FPI pulled out ₹2,288 crore from the equity market. They were net buyers in the debt market to the tune of ₹857 crore. So far, in 2022, FPIs have removed ₹1,69,443 crore from the equities market.

Foreign Portfolio Investors (FPIs) selling bias does not seem to fade anytime soon as the June month begins with a bearish sentiment as volatility continues in markets amidst macro backdrops. FPIs have been net sellers in the Indian equities for the past 8-9 months now. Indian benchmarks have corrected significantly with Sensex below 56,000 and Nifty 50 under 16,600-level currently.

NSDL data shows that, from June 1st to 3rd, FPI pulled out ₹2,288 crore from the equity market. They were net buyers in the debt market to the tune of ₹857 crore.

In May, FPIs outflow stood at ₹39,993 crore, and the selling aggregated to the tune of ₹17,144 crore in April this year.

So far, in 2022, FPIs have removed ₹1,69,443 crore from the equities market.

On Thursday, BSE Sensex closed at 55,769.23 lower by 48.88 points or 0.09%. Nifty 50 ended at 16,584.30 below 43.70 points or 0.26%.

 “The late sell-off indicates the lack of confidence in the domestic market driven by the concerns over Central Bank policy. While in the global market, the investors were waiting for the release of US job data.”

Why are FPIs net sellers?

In the recent past the market has witnessed a trend of massive cash outflows, especially in the equity segment, largely due to dilution by the Foreign Portfolio Investors (FPIs) consistently for the past 8-9 months. The major driving factors for foreign institutions for such withdrawal from emerging markets are attributable to few global and domestic factors. Apart from India, other emerging markets, including Taiwan, Indonesia, South Korea and the Philippines are also facing the heat, resulting in a substantial selloff.

On the global front, the key contributor is the rising interest rates. Additionally, there are concerns of uncertainty about the ongoing military conflict between Russia and Ukraine which is impacting the crude prices. Globally, the rate hikes by the US Federal Reserve, tightening of monetary policy by the global central banks, and appreciation of the foreign currency dollar rate have triggered offshore investors to offload the equities from sensitive markets.

Meanwhile, on the domestic side, the rate hike made by the RBI in the last month has added fuel to the fire. Even the financial results of some of the large-domestic corporates were not following the expectations. There are concerns that these factors could be a dampener to the recovery path of the economy in the post-pandemic phase and put a curb on household spending. Taking a clue from this in its update to Global Macro Outlook 2022-23, even Moody’s Investors Service slashed India’s economic growth projection to 8.8% for 2022 from 9.1% earlier.

What’s ahead?

The next key thing to watch is RBI’s monetary policy this month. In May, RBI was surprised by hiking the policy repo rate by 40 basis points to 4.4% to tackle mounting inflation which has stayed above the central bank’s comfort zone for the fourth consecutive month.

“We expect the RBI to hike interest rates by anywhere between 25-40 bps in the June policy meeting. No doubt inflation has risen in India, and it is largely attributable to the global geopolitical environment. The GDP growth of 8.7% in FY22 on the low base, still shows that domestic demand remains feeble and with higher inflation dampening the purchasing power, the regulator may not want to raise rates too aggressively. RBI is taking measures to bring down excess liquidity in the system to control the inflation, meanwhile, the Government is also managing inflation by reducing tax on petroleum products and restricting the exports of essential commodities.”

“The RBI is expected to hike rates by 25bps to 35bps and the Fed by 50bps, but the outlook & changes in the economic growth and inflation will determine the market trend. If the central banks decide on a stringent policy tightening, the market mood can swing bearish.”

Inflation being a key factor will be the central point of all discussions in the coming week as China and United States’ inflation statistics will be released. Another significant event for domestic markets will be the outcome of the RBI MPC meeting. Market participants will try to read between the lines of the RBI’s monetary policy and given the worsening inflation fears, the street expects a 35-50 bps repo rate hike this time. Considering these major events, investors are currently advised to use knee-jerk reactions to, at best, cherry-pick quality stocks in resilient sectors and invest in a staggered manner.

Giving an outlook on FPI’s investments in the equity market, the volatility trend is temporary and may subside in the coming months, thanks to the above-average monsoon prediction which will give a boost to the industry and agricultural growth. Positive credit growth, a substantial increase in the long-term investment plans by large industry players, and a significant budget allocation on capital spending made by the government will act as catalysts for bringing back the momentum in the investment cycle.

Also, recent developments on easing the regulatory and tax laws have once again reiterated the firmness of the government to provide more avenues for foreign investments. This will surely have a multiplier effect to contribute to India’s growth story and dream of becoming a USD 5 trillion economy by 2025. There are signs of FPI selling exhaustion. In the early days of June, FPI selling is in very small amounts.

“If the dollar and the US bond stabilises, FPI selling is likely to stop and may even reverse. On the contrary, if US inflation remains elevated and dollar and bond yields continue to rise, FPIs may resume selling. US inflation data is the key.”

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