Indian Market Plunges: ₹60 Trillion Lost Amidst FPI Sell-off

Indian Market Plunges: ₹60 Trillion Lost Amidst FPI Sell-off
  • ₹60 trillion lost in Indian equities.
  • FPI selling drives market downturn.
  • Falling rupee and rising crude hurt.

The Indian stock market has experienced a significant downturn in recent months, resulting in a staggering loss of approximately ₹60 trillion in investor wealth over a period of just over 100 days. This dramatic sell-off is primarily attributed to the aggressive offloading of shares by foreign portfolio investors (FPIs), who have been net sellers of Indian equities since October. The impact is widespread, affecting not only the benchmark Nifty 50 index, which has corrected by 12%, but also broader markets like the Nifty Smallcap 250 and Nifty Midcap 150, which have both fallen by 13.5%. This substantial decline represents a market correction exceeding 10% from its September highs, and highlights the significant volatility currently plaguing the Indian financial landscape.

Several interconnected factors contribute to the FPIs' decision to divest from the Indian market. A weakening rupee, coupled with rising crude oil prices, presents a significant headwind. The strengthening US dollar, driven by rising bond yields in the US as the Federal Reserve continues its rate-hike cycle despite economic uncertainty, further exacerbates the situation. The rising bond yields make US investments more attractive to global investors, leading to capital outflow from emerging markets like India. Moreover, geopolitical tensions, including fresh US sanctions on Russia, continue to fuel uncertainty and instability in global markets, influencing FPI decisions.

While domestic institutional investors (DIIs), largely composed of mutual funds, have been net buyers of Indian equities during this period, their purchases have not been enough to offset the significant selling pressure from FPIs. The DIIs' buying activity occurs at lower prices, allowing the FPIs to exit their positions albeit with lower returns. Market experts like Nilesh Shah, managing director at Kotak Mahindra AMC, anticipate continued volatility as long as FPI selling persists. He suggests that DIIs' efforts to provide FPIs with an exit will only further depress prices in the short term. The market is expected to resume its uptrend only once FPIs cease selling and transition to a buying stance.

The combination of a weakening rupee and rising crude oil prices creates a ‘double whammy’ for Indian equities, according to G. Chokkalingam, founder of Equinomics. This negative confluence, coupled with the upcoming inauguration of President Trump and the potential impact of his economic policies, contributes to the overall market uncertainty. The depreciating rupee reduces the dollar returns of FPIs, providing another incentive for them to exit the market. Brent crude has already risen by 12% since late September, crossing the $80-a-barrel mark, further increasing inflationary pressures within the Indian economy and adding to investor anxieties.

The current market correction is not unprecedented. The Indian market experienced a similar, albeit longer, correction from October 2021 to June 2022, lasting eight months and resulting in a ₹34.81 trillion erosion in market capitalization. The Nifty 50 index experienced an 18% decline during this period. This historical precedent suggests that the current downturn could potentially last for an extended period, although the precise duration remains uncertain. The market's future trajectory heavily hinges on the actions of FPIs and the resolution of global macroeconomic headwinds. Investors are advised to focus on quality investments and adopt a long-term perspective to navigate the inherent volatility in the current market environment.

The situation underscores the intricate interplay between global and domestic economic factors in shaping market dynamics. The dependence on FPI investment highlights the vulnerability of emerging markets to global capital flows and underscores the need for greater domestic investment and diversification to reduce reliance on external sources. The long-term outlook for the Indian market remains positive given its underlying economic fundamentals. However, the current turbulent period serves as a reminder of the inherent risks associated with equity investments and the importance of considering a diversified investment strategy, risk tolerance, and a long-term investment horizon.

Source: Investors lose ₹60 trillion in little over 100 days; pain to continue

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