Investment by overseas mutual funds in India witnessed a net outflow for the 16th quarter in a row with a net outflow of $1.28 billion in three months ended March against the net outflows of $435 million in the quarter ended last December as the recent interest rate hikes making global markets more attractive even amid the concern over weak economic growth prospects.
Offshore mutual funds form an important component of total foreign institutional investments, apart from other large foreign institutional investors such as insurance companies, hedge funds, and sovereign wealth funds.
Global mutual funds’ investment in India can be divided into two categories — India-focused offshore funds and ETFs and regionally diversified offshore funds and ETFs (or funds having a partial allocation to India).
India-focused offshore funds registered a net outflow of $800 million against a net outflow of $638 million in the December quarter, while offshore ETFs also registered a higher outflow of $475 million ($203 million), according to a MorningStar India report.
Offshore funds and ETFs are an important investment vehicles through which foreign investors invest in Indian equity markets.
Decline in asset base
Fall in the Indian equity markets, particularly in the mid- and small-cap segments, coupled with net outflows led to a decrease in the assets of India-focused foreign funds and their asset base declined by 7 per cent to $47 billion against $50 billion in the December quarter after six consecutive quarters of increases in their asset size.
The first week of May changed the broader landscape of FII flows as RBI hiked the key bank rates in an off-cycle monetary policy review early this month. This had led to a downward spiral of FIIs ever since. On the other hand, the US Fed also raised rates by 50 basis points, the biggest hike in two decades. FIIs were net sellers to the tune of $18.27 billion in the Indian equity market so far this year till May 10.
‘Ground reality remains grim’
Himanshu Srivastava, Associate Director, Morningstar Investment Adviser India, said, as the scenario stands today, there is nothing much to cheer up foreign investors and coax them to invest in Indian equities. The ground reality remains grim with both RBI and the US Fed increasing key bank rates, uncertainty surrounding the Russia-Ukraine war, high domestic inflation numbers, volatile crude prices, and weak quarterly results.
The recent rate hikes could also slow the pace of economic growth, which is also a concern. Adding to the worry is the resurgence of Covid cases in China and other parts of the world. FIIs typically in these scenarios turn risk-averse and adopt a wait-and-see approach until greater clarity emerges, he said.
Under the given circumstances and fast-changing global landscape, foreign flows into Indian equities could continue to be under stress until there is a change in underlying drivers and investment scenario.
May 22, 2022