FPI Inflows Forecasted to Experience Volatility in the Near Future, Keeping Investors on Their Toes

Volatility in Investment Flows Expected

The US Federal Reserve’s decision to raise interest rates by 25 basis points has affected investments made by foreign portfolio investors (FPIs) in the Indian equity markets. The announcement by the Fed has triggered volatility in FPI investments, resulting in uncertain trading sessions. Experts suggest that this volatility may continue in the near term despite assurances of strong underlying fundamentals supporting long-term FPI investments.

Concerns Raised about Additional Rate Hike

While the interest rate hike was expected, concerns have arisen due to the US central bank indicating the possibility of an additional rate increase. This has led to a rise in the dollar index (strengthening of the dollar against the rupee) which influences FPIs’ decisions and investment flows. Analysts state that FPIs have already started liquidating their long positions in anticipation of the rate hike.

Impact on Fund Flows and Investments in Indian Equities

• Provisional data from the NSE shows that FPIs were net sellers of ₹701.17 crore in the Indian markets on Monday.
• The depreciating currency against the dollar after the interest rate hike may prompt FPIs to offload their holdings in local equities, resulting in choppy overseas fund flows.
• The Fed’s indication of an additional rate hike may lead to fund outflow from emerging markets and increased investments in secure US bonds.
• Net investments in the month and so far in 2023 remain positive, but volatility in fund flows is expected to continue in the near term.
• Sufficient liquidity and strong corporate performance in India have been attractive to FPIs.
• India’s premium against its Asian peers has eased to seven-year mean levels.
• Earnings growth visibility remains strong and positive for the markets, which is expected to sustain FII interest in India.
• Overall, despite short-term volatility, experts anticipate that flows into India will continue, driven by strong fundamentals and attractive valuations.

Conclusion

The US Federal Reserve’s interest rate hike has introduced volatility into FPI investments in the Indian equity markets. While uncertainty and choppy fund flows may persist in the near term, experts believe that strong fundamentals and attractive valuations will continue to support investments in India.