But then, someone – the owner of mangoes comes and takes them away to serve them to someone else.
This is a story of absolute sorrow, right?
Indian companies are experiencing similar sadness because foreign institutional investors (FIIs) are taking back their investments.
Since October 2021, FIIs are constantly selling Indian shares. If anyone asks, why the stock market is falling, the FII selloff is one big reason.
In fact, from October 2021 to March 2022, FIIs have sold around ₹19.7 bn. This sale is significatly higher than the sale of ₹528.9 bn in 2008 – the year of global financial crisis.
The FIIs selling in the first 5 months of 2022 is higher than total FII buying in 2021. This has taken FII investment in India to the lowest for the entire decade.
But what changed suddenly? Why are FIIs selling Indian shares big time?
Why are FIIs Selling Indian Shares?
#1 Global liquidity tightening
During the pandemic, the Reserve Bank of India (RBI) took several measures to address the liquidity constraints like a decrease in interest rates and an increase in the repayment period.
RBI went out on a limb. It took conventional and unconventional measures to ensure liquidity in money during stressful times.
However, with the Covid-19 situation finally relaxing, RBI is also reversing its measures to ensure liquidity.
Like RBI, the central banks of America and England also have been taking measures to control the liquidity. Hence, global liquidity is tightening because global interest rates are increasing.
A rise in interest rates will lead to a reduction in risk-free returns. Risk-free returns will reduce because as interest rates rise, new bonds offer a higher rate of return.
Also, the price of existing bonds will fall because they have to remain competitive with new – higher interest rate bonds.
Let us take an example: Let the old interest rate be 9%, and the new interest rate is 10%. Bond X was issued at 9% for a price of ₹100. After the hike in interest rate, a new bond ‘Y’ is issued at 10% with a price of ₹100.
Hence Y will pay 1% higher fixed return than ‘X’ but, both X and Y are available at ₹100. In this situation, no one will buy ‘X” because it pays low at the same price.
Hence, the price of X will have to fall to remain competitive. Let us say the price of X falls to 80.
Resultantly, an investor of ‘X’ will earn a fixed return of 9%, while the value of an investment will go down by ₹20.
Investors in old bonds will have to walk on a double-edged sword. They will earn interest at lower rates, and the value of their investment will also fall.
Hence, to avoid this situation, FIIs have been selling their investments in Indian share markets.
#2 Depreciating rupee
In 2022, the price of an Indian Rupee as compared to the US Dollar has fallen drastically. 2022’s lowest dollar exchange rate was the US$ 1 = ₹73.8 on 12 January 2022.
This exchange rate is already high in itself but, this was the lowest point in 2022. This paradoxical situation explains vividly how quickly the rupee has depreciated.
On 9 June 2022, the Rupee-Dollar exchange rate was US$ 1 = 77.834, which is the lowest ever rupee price. The exchange rate dipped for a while in April. But around Mid – May, it started rising again and has been surging high ever since then.
Of course, FIIs’ home currency is not the rupee. Hence, when they sell shares, they earn in INR terms, but they will have to convert INR to their home currency.
On the contrary, Indian share markets started correcting in 2022.
Hence, FIIs were losing the value of their investment in the current market scenario.
Correcting markets combined with a falling rupee were good enough reasons to send the FIIs packing home.
Also, in October 2021, Indian stock markets were soaring while exchange rates were controlled. This means it was a very good opportunity for FIIs to book profits on their investments. As a result, they were motivated to sell Indian shares.
#3 Ukraine Russia war
Exploring nature in a forest is one of the best experiences mankind can have. But, when a forest fire starts, you do not wait for the tree next to you to catch fire. You leave the forest the moment you come to know about the fire.
Ukraine-Russia war tension was like this forest fire. With the possibility and rumours of World War III, an obvious panic rose among FIIs.
Hence, FIIs started pulling their money out of all emerging markets because, with or without the world war, emerging markets would take the worst hit.
So it’s confirmed FIIs are selling. But where are they investing?
In 2022, FIIs withdrew a lot of money from many countries. But simultaneously, it has also invested huge money in other countries. The investment has shifted from importing to exporting countries but, why?
Read on to find out why?
Why the shift?
When a war takes place, the global import-export cycle is impacted, not to forget that Ukraine and Russia both, are key exporters. Hence, when their commercial operations were hampered, the prices of the commodities that they exported rose globally.
Global crude oil prices have reached their highest in 2022. This impacts the prices of all commodities because the supply chain becomes costly. Hence, all commodities become costly.
As a result, exporting countries are at an absolute advantage right now because they can sell their products at increased prices.
FIIs saw this opportunity and started shifting their investments from importing countries to exporting countries.
FIIs invested the highest in money in these countries: US $ 12,686 in Brazil, US $ 2,663 in Thailand, and US $ 1,344 in Indonesia.
But why did investment specifically increase in these three countries? Let us find out why?
Why these countries?
Russia is one of the chief exporters of crude oil and energy products. Ukraine exports a huge amount of raw materials for iron, steel, mining, agricultural and also, chemical products, metals, and machinery.
Brazil was the 9th largest exporter in the world. With a reduction in crude oil supplies from Russia, Brazil is rolling in money because its exports have increased rapidly.
Brazil being a crude oil supplier, bagged the highest investment from FIIs. The next in line in Thailand.
Thailand thrives on exports. 65% of its GDP comes from exports. Thailand exports machinery and electrical goods. Many of these were sold by Ukraine. Hence, in March 2022, Thailand made record-high exports of US $ 28.9 bn.
Indonesia also made record-high exports of US$ 26.5 m in March 2022. This is 44.4% higher on a YoY basis. Indonesia’s most important exports after oil and gas are coal, steel, nickel, and other metals.
Hence it will suffice to say that Brazil, Thailand, and Indonesia sell what Russia and Ukraine used. Hence, unsurprisingly the exports of these countries have increased.
This is a crystal clear investment opportunity and FIIs are making the most of it.
Will FIIs come back to India?
Indian share markets almost stand corrected. The companies are coming out with Q4 results. In these results, a clear recovery from the Covid-19 period can be seen.
This has sent a wave of positivity in Indian share markets. Hence, we can see that Indian share markets have been recovering in some sort. FII outflows have been less compared to the previous month.
Also, FIIs investment had shifted because of increasing commodity prices and reduced exports from Russia and Ukraine.
Hence, when the Russia- Ukraine war situation will normalise, commodity prices will come down from their high. Russia and Ukraine will not be able to gain back their export levels immediately but, there will be some obvious and gradual changes in the export ratio.
Another effect of the war situation normalising will be dollar will lose its pricey status. Hence, Rupee will strengthen.
Hence, all the reasons why FIIs are moving away from India will be mitigated. The negatives will gradually turn into positives, and FIIs will come back to India.
One interesting scenario that emerged in this historic FII sale was that the fall in indices compared to the selloff by FIIs has remained negligible.
Why did the share market not fall drastically? What managed to uphold the market?
Stay tuned to this platform to find out.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com