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The Impact of Rising US Interest Rates: FPIs Withdraw ₹10,000 Crore in September

US interest rates

Since the current financial year started, Foreign Portfolio Investors (FPIs) have been buying Indian stocks, but they appear to be switching their focus to US bonds. For the first three weeks of September, they have pulled out ₹10,000 crore from Indian stocks due to rising US interest rates .According to market pundits, the hawkish Fed commentary, along with the revival of recession fears and highly-priced Indian stocks, are driving them homeward.

Between March and August, foreign portfolio investors bought Indian equities incessantly, bringing in ₹1.74 lakh crore.

Valuations that are high-rising US interest rates

Since valuations remain high even after the recent pullback and US bond yields are attractive (the US 10-year bond yield is around 4.49 percent), FPIs are likely to press sales as long as this trend continues, according to Geojit Financial Services Chief Investment Strategist V K Vijayakumar.

According to Vijayakumar, even after the recent correction, Nifty is trading around 20 times FY 24 earnings, making India the most expensive market in the world. Aside from the fact that India is the fastest growing economy in the world, FIIs can become buyers even if US bond yields remain high if the markets correct further, say by 3-4 percent.

Craving Alpha’s Mayank Mehra believes that in the coming month, foreign investment flows will be supported by strong economic growth prospects, attractive valuations, and government reforms.

The depositories report that in the 15 trading days so far in September, FPIs sold in 11 days with a net withdrawal of ₹10,164 crore.

Bulk deals and primary market investments are included in this figure.

Over 4,700 crore was withdrawn in the last week alone of the 10,164 crore pulled out so far this month (until September 22).

It comes after FPI investment in equities fell to a four-month low of ₹12,262 crore in August.

Over the past few weeks, FPI flows have been subdued. Himanshu Srivastava, Associate Director – Manager Research, Morningstar India, explained the hesitancy among investors as a result of growing apprehensions about inflation and the interest rate landscape, particularly in the US, as well as uncertainties about global economic growth.

Consequently, investors have become cautious and have adopted a “wait and watch” approach when investing in emerging markets, such as India.

FPIs are on the defensive due to higher oil prices and higher US yields, but YES Securities India’s Hitesh Jain, Strategist Institutional Equities Research, predicted that stable economic growth in India versus China and other emerging markets (EMs) will bring FPIs back to Indian equities.

A total of ₹295 crore was invested by FPIs in the country’s debt market over the same period.

In total, FPIs have invested about ₹1.25 lakh crore in equity this year, and close to ₹28,476 crore in debt.

As of September 15, mining, power, services, oil, and telecommunication had the highest outflows, while financial services, capital goods, consumer services, IT, and real estate had the highest cumulative inflows.

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