Last week’s announcement by the Fed has sparked volatility in FPI investments, leading to uncertain trading sessions.

Experts said the volatility in investment flows may persist in the near term, despite assurance of underlying fundamentals supporting long-term FPI investments.

While the interest rate hike by the Fed was along expected lines, concerns have arisen as the US central bank has left the door open for an additional rate increase, said experts.

This also led to a rise in the dollar index (strengthening of the dollar against the rupee), a a crucial factor for investment flows that influence FPIs’ decisions. According to experts, FPIs are curtailing some of their long positions since the interest rate hike, which led to some selling pressure that may continue for a few days.

Provisional data from the NSE showed that FPIs were net sellers of ₹701.17 crore in the Indian markets on Monday. “While FIIs remained net buyers of Indian equities in July, overseas fund flows could be choppy this week as a depreciating currency against the dollar after the Fed’s interest rate hike by 25 bps can prompt them to offload their holdings in local equities,” said Shrikant Chouhan, head of research, retail, Kotak Securities Ltd.

Moreover, the Fed‘s indication of an additional rate hike amid the uncertain inflation trends may influence global investor sentiments, that may lead to fund outflow from emerging markets while bolstering investments in secure US bonds, said Chouhan

In fact, FPIs had started curtailing positions a few days prior to the rate hike in anticipation of the Fed’s move, said analysts.

Ashwin Ramani, derivatives and technical analyst, SAMCO Securities, FPIs have been liquidating their long positions since 21 July after the Nifty hit an all-time high of 19,992 in the previous session.

While fund flows have been volatile in the last few days, net investments in the month and so far in 2023 remain in the positive zone. Overall investments made by FPIs stood at ₹46,618 crore in July, showed NSDL data. Since January, FPI invested ₹1.23 trillion ( ₹123,025 crore) in Indian equities, leading to a significant rise in the indices. The Sensex is up by over 15% since the March lows.

Although volatility in fund flows will continue in the near term, experts said fundamentals are supportive and flows into India may continue. Sufficient liquidity in India versus historical levels and also compared to other emerging markets has been attractive to the FPIs, experts added.

India’s premium against its Asian peers had eased to seven-year mean levels. “Interest can moderate from peak levels, based on global quantitative tightening, but FII interest in India will sustain, considering strong corporate performance.” Pramod Amthe head Of institutional equity research, InCred Capital, said.

Further Siddarth Bhamre, Research Head, Religare Broking Ltd, highlighted that the earnings growth visibility remains strong and is positive for the markets.

Even Manish Jain, Fund Manager, Coffee Can PMS, Ambit Asset Management said: “Given the strong earnings momentum across large, mid, and small caps and inexpensive valuations, we would expect the flows to continue and hence equity markets to remain strong.”

Updated: 31 Jul 2023, 11:52 PM IST