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.