Amidst the Reserve Bank of India (RBI) and the US Federal Reserve boosting interest rates, foreign investors pulled out around Rs 6,400 crore from the Indian equity market in the first four trading days of this month. For the seven months leading up to April 2022, foreign portfolio investors (FPIs) were net sellers, removing a staggering amount of nearly Rs 1.65 lakh crore from equities. This was largely due to expectations of a US Federal Reserve rate hike and the deteriorating geopolitical environment following Russia's invasion of Ukraine.
Following a six-month selling run, FPIs became net investors in the first week of April when markets corrected, investing Rs 7,707 crore in shares. They turned net sellers after a brief respite during the holiday-shortened April 11-13 week, and the sell-off persisted in subsequent weeks. FPI flows have been negative in May so far, with about Rs 6,417 crore sold between May 2 and 6, according to depositories' data. Due to the Eid holiday, the market was closed on May 3.
Multiple reasons behind pull off
On May 4, the RBI raised the policy repo rate by 40 basis points with immediate effect and the cash reserve ratio by 50 basis points with immediate effect in an off-cycle monetary policy review. The markets reacted strongly to this, and they have been on a downward trend ever since. The US Federal Reserve, on the other hand, boosted rates by 50 basis points on the same day, the largest increase in two decades.
Moreover, the Bank of England raised its main interest rate to its highest level since 2009. In addition, the market anticipates 10% inflation in the United Kingdom. Concerns over COVID-19 in China could also disrupt global supply networks and slow growth.
