By Ashley Coutinho
A risk-off sentiment has gripped global equities as major central banks have stepped up their fight against rising inflation.
In CY22, FPIs have offloaded the most in financial services and information technology stocks, sectors which together have about 50% weightage in key benchmark indices. Assets under custody of IT stocks have fallen 36% to $64.6 billion in the six months to June 30, 2022, while that of financial services firms have shrunk 15% to $162.7 billion, data from NSDL show.
“FPI selling, trade imbalance and the strengthening seen in the dollar index have contributed to the fall in the rupee, with the latter being the main culprit,” said Deepak Jasani, head – retail, HDFC Securities.
The dollar index has appreciated 3.6 per cent in the last one month and 13% in the year to date.
“The trade deficit has widened on account of rising oil prices and that has also created pressure on the rupee. FPI selling has been a contributing factor as well, but a lot of this selling has been compensated by FDI inflows,” said Jasani.
He added that there is currently no reason for FPIs to turn large buyers and they may use every rise in the market to offload stocks till the dollar and commodity prices stabilise and geopolitical concerns abate. The benchmark BSE Sensex slid about 0.8% this week to 53,760.
“The current slowdown globally is expected to impact IT spending of companies, which is why these stocks are seeing selling pressure. Banks are in a better position with NPA problems being largely behind, and we expect the BFSI and auto space to see renewed FPI interest after a few quarters,” said UR Bhat, director at Alphaniti Fintech.
Bhat is hopeful that FPIs will return after a quarter or two, especially if inflation eases and the likelihood of further interest rate hikes is curtailed. “Commodity prices have come off a bit and inflation may cool off a bit going forward, especially if there is less disruption in the movement of food grains from Ukraine,” he said.
“India still commands a valuation premium compared to its peers’ given superior corporate fundamentals. Amid high inflation and aggressive tightening by central banks, the downside risks to earnings growth are emerging. While we do not expect major earnings cut for Indian equities, some moderation in earnings growth cannot be ruled out, especially if global headwinds worsen further. Against this backdrop, we believe that volatility in equities may continue as multiple headwinds impact investor sentiments,” Credit Suisse said in a recent note.
