Foreign investors have pulled out nearly Rs 60 billion from the Indian capital markets in just six trading days of the month primarily due to better opportunities in other emerging nations.Net withdrawal by foreign portfolio investors (FPIs) from equities stood at Rs 24 billion during March 1-9, while the same from the debt market was Rs 34.73 billion, translating into a total outflow of Rs 58.83 billion, depositories data showed.
This follows an outflow of over Rs 110 billion from the capital markets — equity and debt — last month."FPI outflows from Indian markets are a result of growing demand for the US dollar, coming from the expectation of an increase in the Federal rate. FPI may also be pulling funds from India to invest in other growing economies," Harsh Jain, co-founder and COO at Groww said.Himanshu Srivastava, senior research analyst, at Morningstar Investment Adviser India said that February was not conducive on both global and domestic fronts for FPIs.
The introduction of long-term capital gain (LTCG) tax in equity investments announced in the Union Budget on February 1 was the first blow to sentiments. While it did not attract a knee-jerk reaction from FPIs, it did raised concerns and slowed down the pace of FPI flows.Later, a global sell-off was triggered after fears of creeping inflation and higher borrowing costs compounded volatility in financial markets across the globe.
That is when FPIs started pulling out money from the Indian equity markets."However, this was not a surprising scenario. Usually, amid global sell-offs, there tends to be a risk aversion among FIIs. In such a situation, they tend to pull out money from emergingmarkets like India, which are considered to be riskier than developed markets and more susceptible to global risks," Srivastava said.The situation further worsened after the Punjab National Bank scam came to light. This not only pushed domestic stock market down but also led overseas investors to adopt a cautious stance and pull money out of the country's equity market.
Investors withdraw Rs 7.7 bn from gold ETFs in FY18 so far on poor returns
Meanwhile, investors pulled out Rs 940 million from gold exchange-traded funds (ETFs) in February, taking the total outflows to Rs 7.73 billion in the first 11 months of 2017-18 mainly due to poor returns and volatility in prices.
However, experts believe next financial year can be slightly better for gold ETFs as ongoing uncertainty in the global market might increase the demand for the precious metal.
According to the Association of Mutual Funds in India (Amfi) data, a net sum of Rs 940 million was pulled out from 14 gold-linked ETFs in February, as compared to an outflow of Rs 460 million in the same month in 2016-17.
In January, a net amount of Rs 1.1 billion was withdrawn from the instrument.
With the latest outflow, the total pullout has reached to Rs 7.73 billion in the April-February period of the ongoing fiscal.
LTCG tax is no hurdle for investments in mutual funds
However, investors in Indian equity funds are keeping faith unfazed by Long Term Capital Gains tax, on stock holdings, Punjab National Bank fraud scandal and turmoil in global markets.
Equity funds took in Rs 163 billion ($2.5 billion) in February, after pulling Rs 154 billion in January, data from the Association of Mutual Funds in India show.
Investors held their nerve even after the government’s decision on February 1 to impose a tax on equity gains and dividends from stock funds, a move that coincided with the selloff in markets from the US to Japan. The liquidity has provided a buffer against outflows sparked by the risk-off mood: mutual funds bought $2 billion of shares last month, countering sales of $1.9 billion by their global peers.
“Going by the way things are, 2018 looks to be a bumpy ride and equities will need this support,” said Andrew Holland, chief executive officer at Avendus Capital Ltd. in Mumbai.
“There aren’t many options that can give decent returns but stocks,” Vidya Bala, head of research at FundsIndia, said by phone. “Retail investors are not going to pull out from equity funds unless there’s a prolonged correction. It has been proven that they can digest short-term declines.”
Local stock funds received Rs 1.64 trillion of net inflows in the first 11 months of the year that began April 1, more than double those of the year-earlier period: AMFI.
Inflows into balanced funds, which buy stocks and bonds, fell to Rs 50 billion in February from about Rs 77 billion in January, the data show.
The reduction was anticipated as “these funds are packaged in a way as to entice fixed-income investors through monthly dividend options. The budget imposed a 10 per cent tax on dividends distributed by equity funds,” CLSA India Pvt. said in note.
While the full impact of the capital-gains tax on the sustainability of flows would be best gauged in the next couple of months, the February data is “reassuring,” CLSA said.
“We believe that the $25 to $30 billion — 5 to 6 per cent of annual household savings — of domestic inflows into equities should easily sustain and are also needed given the large equities supply,” the brokerage said.