Last year was an unforgettable one for the Indian financial market as far as foreign flows went. Foreign portfolio investors (FPIs) turned net sellers in Indian debt and equities in 2018. It was the first time since 2002 that FPIs became net sellers in both the debt and equity segments in a single year. They sold $6.92 billion in debt and $4.33 billion in equities. The combined outflow of $11.25 billion is the highest ever for the data available since 2002.
Driving factors
While the debt segment witnessed massive outflows in the first half of the year, FPIs pulled out large sums of money from equities in the latter part of 2018. Two major factors led to strong outflow in the debt segment — increasing US Treasury yields and the US Federal Reserve hiking interest rates. The US 10-year Treasury yields surged over 3 per cent in May 2018 for the first time since 2013. At the same time, the Federal Reserve continued to increase its interest rates and also hinted that there will be four rate hikes in 2018 as against the three projected in 2017.
Forecast of a faster pace of rate hikes coupled with rising bond yields led foreign investors to pull money out of the Indian debt market and invest it back in the US for better returns. As a result, this segment saw an outflow of $6.12 billion in the first six months of 2018. The outflow in equities was just $791 million in the same period.
Things turned around in the second half of the year as the debt outflow eased and the equity segment came under pressure. The US Treasury yields reducing from 3.25 per cent to the current level of 2.62 per cent kept the outflow in the debt segment limited to $802 million in the latter half of the year. But the equity market witnessed large sell-off — the IL&FS crisis increased the pace of foreign money outflow. FPIs pulled out $3.53 billion in the last six months of 2018.
A year of records
The combined $11.25 billion outflow from both equity and debt in 2018 was the highest since 2002. The $6.9 billion outflow from the debt market was the second highest since 2002 (2013 saw the highest outflow of $7.97 billion following taper tantrum).
In the equity segment, after years of consistent inflows, FPIs pulled out money from the country for the first time since 2011. The $4.33-billion outflow was the second highest on record. The strong sell-off after the IL&FS crisis caused an outflow of $3.93 billion in October. This was the highest recorded outflow in a single month.
What to watch for
The general elections will be a key event to watch out for on the domestic front — the increasing noise ahead of the elections may keep the foreign flows volatile. However, a stable government formation is imperative to revive the inflows.
On the global front, the US Federal Reserve has projected two rate hikes for 2019. If it decides to increase the pace of rate hikes, FPIs might pull out more money.
The third factor to watch out for is global growth. Concerns of a global slowdown are increasing, especially after the International Monetary Fund lowered its forecast for 2019. A slow down could keep the inflows muted.