FPI Outflows & NIFTY Returns

Between October 2021 and June 2022, Indian equity markets have witnessed a sell-off of over INR 2.19 lakh crore by Foreign Portfolio Investors (FPIs), inducing volatility in the equity markets. This sell-off has been on the rise as a result of multiple factors.

With the geopolitical tensions between Russia and Ukraine deepening, the sanctions and retaliatory actions have intensified leading to a dislocation in global supply chain, inducing a volatility in global commodity and financial markets. With demand rising world over as a result of further recovery from the after-effects of the pandemic, and supply becoming a constraint, inflation has been rising globally.

With the playout of the above factors, globally, central banks have been normalizing monetary policies and raising policy rates to tame inflation. Rising rates and quantitative tightening are a key reason behind the ‘risk-off’ flows from emerging markets including India.

In the past, as seen in the table below, different global or local events have triggered the sell-off by FPIs. As a result, NIFTY 50 TRI has reacted negatively during the period of the sell-off.

But interestingly, the end of the outflow marked the comeback of the index, delivering competitive returns in the next 2 years.

Source: Bloomberg, NSDL, MFI Explorer *Returns absolute in nature, **Returns are compounded annualized