FPIs pull out Rs 11,000 cr in July, highest since Oct’18; pain likely to continue

Foreign investors turned net sellers in Indian markets in July as they pulled out more than Rs 11,000 crore (nearly $2 billion), highest in 2019 after the central government proposed higher tax surcharge proposed on super rich.

This is the highest ever outflow after October 2018 when foreign investors pulled out Rs 27,622 crore from India’s equity markets, and a little over Rs 10,000 crore from the debt markets, according to the SEBI data.

Incidentally, India’s July outflow is also the highest in the emerging markets followed by Brazil, said a media report. This indicates that the investors have started to shift to other economies that could yield higher returns.

The foreign fund exodus in July was largely by two factors – a) higher tax surcharge, b) slowdown in economic growth. Most experts feel that the sell-off is likely to continue in the near future as well.

The dollar returns are not sufficient enough which could make India an attractive investment destination. But, most of the other developing countries or emerging markets do not have stringent tax rules, say experts.

“We may see outflows that can further extend. Since few concerns are mounting at present. The latest move by the government is going to affect many FPIs that are registered as trusts. This is almost more than 38 percent of the total FPI registered in the country,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.

“Secondly, it is very much true that earnings in terms of dollars are low. While if we talk about the Sensex, it is still very much at the same levels what it was in 2008 high and so is Nifty,” he said.

If we look at the historical data, FPIs were bullish on Indian markets when the scenario was different and valuations were cheap back in 2017-2018.

“Now with the current scenario and on the top of it higher taxes we are seeing this exit of FIIs. It may continue for the coming few months. We believe money is going away for now and in the second quarter, we are going to see the same pattern being followed,” conclude Nadeem.

Even though there could be fierce selling from FPIs in the short term but the trend may not well sustain for long, because India will remain one of the fastest-growing economies in the world despite recent downgrades on the growth rate from various agencies such as IMF, CRISIL and Fitch.

There is definite pressure on FIIs to deliver super returns (beyond benchmark) to be able to justify the multiple taxes especially LTCG and the additional surcharge. But, higher valuations and additional taxes weaken its case. However, experts feel that some FIIs will stick around thanks to demographic setup which would keep the growth rate ticking.

“India is indeed the only country that taxes FPIs but the outflows are unpredictable and as long as the valuations are lofty in some largecaps, they will be selling targets for FPIs,” Umesh Mehta, Head of Research, SAMCO Securities told Moneycontrol.

“But, at the same time, the only reason for FIIs to stick around in some bets is the young demographic setup of India and the economy being the world’s fastest-growing,” he said.

Pritam Deuskar – Fund Manager, Bonanza Portfolio Ltd seconds the thought.

“Currently, DII bought an equal amount. When chances of the world over central banks are about to cut the rates starting from ECB and Federal Reserve. This can be the start of money flow to emerging economies and India stands well in them,” he added.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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