Chinmaya IAS Academy – Current Affairs Chinmaya IAS Academy – Current Affairs
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- June 2022 witnessed the worst Foreign Portfolio Investor (FPI) selloff since March 2020 when India announced a nationwide lockdown at Rs. 50,000 crore.
- June was also the ninth on the trot that FPIs had sold net of their assets i.e. sold more than they had purchased.
- Foreign portfolio investors are those that invest funds in markets outside of their home turf.
- Examples of FPIs include stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts (ADRs), and Global Depositary Receipts (GDRs).
- FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).
- The BOP measures the amount of money flowing from one country to other countries over one monetary year.
- They are generally not active shareholders and do not exert any control over the companies whose shares they hold.
- The Securities and Exchange Board of India (SEBI) brought new FPI Regulations, 2019replacing the erstwhile FPI Regulations of 2014.
- FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy. FPI is more liquid, volatile and therefore riskier than FDI.
Significance of FPI:
- Investors may be able to reach an increased amount of credit in foreign countries, enabling the investor to utilize more leverage and generate a higher return on their equity investment.
- As markets become more liquid, they become more profound and broader, and a more comprehensive range of investments can be financed.
- As a result, investors can invest with confidence knowing that they can promptly manage their portfolios or sell their financial securities if access to their savings is required.
- Increased competition for financing leads to rewarding superior performance, prospects, and corporate governance.
- As the market’s liquidity and functionality evolve, equity prices will become value-relevant for investors, ultimately driving market efficiency.
FPI In India
- FPIs are the largest non-promoter shareholders in the Indian market and their investment decisions have a huge bearing on the stock prices and overall direction of the market.
- Holding of FPIs (in value terms) in companies listed on National Stock Exchange stood at Rs. 51.99 lakh crore as on 31st March 2022, a decrease of 3.36% from Rs. 53.80 lakh crore as on 31st December 2021 due to the sustained sell-off since October 2021.
- FPIs hold sizeable stakes in private banks, tech companies and big caps like Reliance Industries.
- The US accounts for a major chunk of FPI investments at Rs. 17.57 lakh crore as of May 2022, followed by Mauritius Rs. 5.24 lakh crore, Singapore Rs. 4.25 lakh crore and Luxembourg Rs. 3.58 lakh crore, according to data available from the National Securities Depository Ltd (NSDL).
Factors Encourage FPI Moves
- 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 Rs. 3,682 crore in 2002.
- This grew to Rs. 1.79 lakh crore in 2010. This correlates with the concurrent expansion of economic output in that period, despite the 2008 global financial crisis which saw FPI selloffs in that timeframe in the country
- Likewise, FPIs withdrew Rs.1.18 lakh crore in March 2020 alone — the month when India announced a nationwide lockdown, triggering concerns around economic growth.
- Rate hikes by the Federal Reserve affects not only the US economy, but also shapes the macroeconomic outlook and exerts a certain degree of influence on the monetary policies in other emerging economies.
- Emerging economies such as India tend to have higher inflation and higher interest rates than those in developed countries such as the US and many of the (primarily Western) European nations.
- As a result, financial institutions, particularly Foreign Institutional Investors (FIIs)would want to borrow money in the US at low interest rates in dollar terms and then invest that money in government bonds of emerging countries such as India in local currency terms to earn a higher rate of interest.
- When the US Federal raises its domestic interest rates, the difference between the interest rates of the two countries decreases.
- This makes India less attractive for the currency carry trade, consequently, some of the money may be expected to move out of the Indian markets and flow back to the US.
SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT
