For the Indian equity markets, year 2018 will end as the worst in terms of foreign money outflows since 2008 when markets across the globe were reeling under the sub-prime crisis and Lehman Brothers filed for the largest bankruptcy in history.
In the Indian context, 2018 would also be only the third such year in the last decade when foreign portfolio investors (FPIs) would end a calendar year as net sellers of Indian shares.
Foreign investors, who have always been looked upon as the prime drivers of any bull run in the Indian equity market, have been net sellers at almost $4.8 billion or ₹33,344 crore during the current calendar year, till date.
Further, the year also saw overseas investors selling shares worth almost $4 billion or ₹28,921 crore in just one month — October — making it the worst-ever month in terms of FPI outflows. The previous high was seen in November 2016, when FPIs sold Indian shares worth ₹18,244 crore.
Market participants are of the view that such significant outflows were primarily on account of the weakness in the rupee and the volatility of the stock markets that saw the benchmark Sensex touching an all-time high of 38,989 in August only to lose more than 9% or more than 3,500 points since then.
“The one big factor that spooked everyone, especially foreign investors, was the fall in the rupee that moved from around 64 level to 74 against the dollar during the year,” said Harendra Kumar, managing director, institutional equities, Elara Capital.
“There was also heightened volatility globally due to the concerns related to the trade war between U.S. and China that made investors stay away from the emerging market pack, including India. The bubble kind of situation in the mid-cap and small-cap segments at the start of the year also led to profit booking from such investors,” added Mr. Kumar.
While the benchmark Sensex had gained a little more than 4% or 1,413 points in the current calendar year, it is insignificant compared with the previous year’s rise of 7,430 points or almost 28% amidst robust FPI flows totalling ₹51,252 crore.
Incidentally, when foreign investors pulled out a record ₹52,987 crore in 2008, the 30-share Sensex had lost a whopping 10,639 points or 52.45%.
Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India equity strategist, Credit Suisse, believes that even if volatility remains high in 2019, the impact on the Indian market would be moderate as foreign investors now have a lesser stake in the markets compared with some of the earlier years.
“… the impact should be somewhat moderated, given that foreign investors have not been meaningful buyers of Indian stocks for the past three years and are now accounting for less than a third of trading volumes,” he said recently while presenting the global financial major’s 2019 outlook for the Indian market.
Meanwhile, most market participants believe that the potential losses this year have been largely mitigated due to the strong buying support, especially in index constituents, from domestic institutional investors such as mutual funds and the Life Insurance Corporation (LIC).
Strong buying by domestic investors also helped the Indian stock markets overtake Germany for the first time ever in terms of market capitalisation. According to data from the World Federation of Exchanges (WFE), the market capitalisation of India was pegged at $2.06 trillion in December, slightly higher than Germany’s $1.9 trillion.