Record domestic inflows counter foreign pullouts in India

Indian investors in the domestic market turned saviours for the country's equity market in 2022 amid aggressive selling by foreign investors.

Domestic institutional investors (DIIs), which include mutual funds, insurance, banks, and other entities, together invested a record sum of Rs2.74 lakh crore in Indian equities this year (till December 22), reports the Indian daily Business Standard. 

According to a report by the Indian Express, Foreign portfolio investors (FPIs) pulled out from the Indian markets in a big way in 2022 with the highest-ever yearly net outflow of Rs1.34 lakh crore.

Citing data from India's National Securities Depository Limited, it states that  FPIs invested Rs50,089 crore in 2021, Rs1.03 lakh crore in 2020 and Rs1.35 lakh crore in 2019.

The outflow, which was surpassed by a significant margin withdrawal of Rs80,419 crore in 2018, came amid aggressive rate hikes by central banks globally.

It also follows the sharp rise in inflation worldwide and rate hikes by global central banks led by the US Federal Reserve. The US Fed has already raised rates by 425 bps this year, moving policy into restrictive territory.

Reserve Bank of India increased the repo rate by a cumulative 225 basis points (bps) in May to rein in elevated inflation.

India's monetary policy committee hiked the repo rate by 40 bps in May and 50 bps in each of the three successive meetings. A basis point is one-hundredth of one percentage point.

FPIs started pulling out after inflation spiked, and the central banks began hiking interest rates.

Experts said the Russian invasion of Ukraine accentuated the FPI withdrawals with the global economic slowdown making inflows more challenging.

Of the major contributors to DII flows in India, Credit Suisse expects insurance ($12 billion a year), Employees' Provident Fund Organization (EPFO) ($7-8 billion) and Systematic Investment Plans (SIPs) ($18-20 billion a year) to sustain, even as non-SIP retail flows continue to moderate due to higher rates and improvement in real estate.

DIIs now own  15% of the BSE-500 shares, just 3.3 percentage points below the share of FPIs, which has now declined to nine-year lows in India.