Foreign Portfolio Investors

In News: Foreign Portfolio Investors (FPIs) have been on a selling spree in India.

• June 2022 witnessed the worst sell-off at ₹50,000 crore.
• Their selling actions have triggered a significant decline in benchmark indices, resulting in a drop in market capitalisation of companies.

What are FPIs?

• Foreign portfolio investors are those that invest funds in markets outside of their home
• Their investments typically include equities, bonds and mutual funds.
• They are generally not active shareholders and do not exert any control over the companies whose shares they hold.
• The passive nature of their investment also allows them to enter or exit a stock at will and with ease.
• Promise of attractive returns on the back of economic growth draws investors including FPIs into a country’s markets.
• As per data from the National Securities Depositories Ltd. (NDSL), FPIs brought in about ₹3,682 crore in 2002.
• The year 2017 saw FPI inflows exceed ₹2 lakh crore.
• Likewise, FPIs withdrew ₹1.18 lakh crore in March 2020 alone — the month when India announced a nationwide lockdown.
• FPIs also show keenness to invest in bonds when there is a favourable differential between the real interest rates on offer in the country they aim to invest in, and other markets, but more specifically, compared with the largest economy in the world, the U.S.

Why have FPIs been selling India holdings?

• FPIs sold assets worth about ₹50,000 crore in June 2022.
• This is the second highest sell-off in a month since 1993, after March 2020.
• Post-pandemic, recovery in the Indian economy has been uneven.
• The second wave of the COVID-19 pandemic in 2021 devastated lives and livelihoods.
• As the industry was grappling with this challenge, came Russia’s invasion of Ukraine.
• Sunflower and wheat supplies from these two nations were impacted, leading to a rise in global prices for these crops.
• As supplies in general tightened across the globe, commodity prices too rose and overall inflation accelerated.
• Industrial production has seen a bumpy without giving confidence of a full and final recovery from the pandemic.
• Purchasing Managers’ Index (PMI) slid to 53.9 in June — the lowest level in nine months — from 54.6 in the previous month.
• With each of these factors contributing to a decline in confidence of robust economic performance, FPIs have been exiting market investments over these past months.
• Adding to this is the S. Federal Reserve raising the benchmark interest rate.
• When the differential between the interest rates in the U.S. and other markets narrow, and if such an occurrence is accompanied by the strengthening of the dollar, then the ability of investors to realise healthy returns is impacted.
• For returns are measured not only by the value appreciation of assets but also by exchange rate changes.
• If the dollar strengthens against the rupee, then an investor is able to realise fewer dollars for a given quantum of rupee assets liquidated.
• They then tend to exit assets seen as ‘risky’ such as in emerging markets like India, Brazil or South Africa.
• The rupee has been depreciating against the dollar, which has seen a general strengthening against several other currencies.

What impact does an FPI sell-off have?

• When FPIs sell their holdings and repatriate funds back to their home markets, the local currency takes a beating.
• After all, they sell rupees in exchange for their home market currency.
• As supply of the rupee in the market rises, its value declines.
• In this instance, the rupee has been seeing all-time lows recently.
• With a weaker rupee, the country has to shell out more funds to import the same unit of goods.

Source: The Hindu

Previous Year Question

Q.1) With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (2020)

1. It is the investment through capital instruments essentially in a listed company.
2. It is a largely non-debt creating capital flow.
3. It is the investment which involves debt-servicing.
4. It is the investment made by foreign institutional investors in the Government securities