Covid Scare Drives FPIs to Pull Out of Equity Markets

As the number of Coronavirus infections is rising in the country, the pace of foreign portfolio investors (FPIs) pulling out from the domestic equity market is also gathering momentum. The second wave of Covid-19 is increasing the number of positive cases rapidly with the latest figure of infections being 3.14 lakh, recorded in the past 24 hours. It is the world's highest single-day tally till now. In the month of April till date, FPIs have pulled out to the tune of Rs 7,042 crore from the Indian equities. Till the first half of the month, this figure was Rs 3,800 crore. 

Also, this is for the first time in calendar year (CY) 2021, that the FPIs have turned net sellers on most of the days of the month. In the first three months of CY21 (January-March), FPIs were net buyers to the tune of Rs 55,742 crore. In January, ahead of the presentation of budget, FPIs were net buyers of Indian equities to the tune of Rs 19,473 crore. Post the presentation of budget, on the expectation of faster than expected recovery of India Inc from the Covid-19 induced slowdown, FPIs stepped up their activity, which resulted in hectic buying in Indian markets and they poured in Rs 25,787 crore in February 2021. However, in the month of March, foreign players’ activity fizzled out as their buying spree reduced by more than half and they bought just Rs 10,482 crore of Indian equities, but the solace was that they are still buying.

S. Ranganathan, Head of Research at LKP Securities said, "While FPIs pulled out only a small sum of Rs 3,800 crores during the first half of the month, the overall sentiments have got impacted due to the spread of the Coronavirus, across multiple states as reflected in the fact that except for the Pharma Index, all sectoral indices are going through a weak to bad phase. Despite several high-frequency indicators pointing towards a slowdown in the economy, this month, the steep rise in metal prices is having a negative impact on the user industries”.

FPIs pull out is a cause of concern also because these were the players who played a crucial role in Indian markets, staging a smart come back last year, when domestic measures tanked during February-March 2020. They pumped in more than $ 36 billion in the first nine months of FY21 in the market. India was the highest recipient of the foreign money among the emerging market peers in CY20. 

“The absence of flows in the month of April should also be viewed in the context of the $ 20 billion inflows in the December quarter which in fact was the all-time highest flow to India in any quarter", Ranganathan said.

However, the dramatic increase in Covid infections coupled with shortage of vaccine in India has put a big question mark on its faster than expected recovery and whatever recovery it may achieve will also be fragile, indicates the trading pattern of FPIs.

Nirali Shah, Head of Research, Samco Securities said, “Unlike in the past, FPIs have diverted from their usual buying behaviour and have turned net sellers so far this month, as India struggles to cope with the increased pace of infections. It will be interesting to see their behaviour going ahead in the year”.

The shaky behaviour of FPIs is taking a toll on markets and other market participants. In the first two sessions of the current truncated trading week, the benchmark indices have lost closer to 2.35 per cent, when it ended in red for two consecutive days in a row. The Nifty has lost 322 points while the Sensex has ended 1,127 points lower. During these two days FPIs were net sellers to the tune of Rs 2,400 crore.

Dealers said, going ahead in the week, the rising number of Coronavirus infected cases and resultant behaviour of FPIs will decide the course of market movement.