Why in the news?
Recently, as per the report, the Indian market has witnessed the exit of FPIs (Foreign Portfolio Investment) due to the Russia-Ukraine war.
What is FPI?
- FPI is a means of investment in which investors comprise securities and other financial assets in other countries.
- FPI comprises stocks, ADRs, bonds, mutual funds, and exchange-traded funds.
- FPI offers the benefits of prompt return or a rapid exit to an investor. And hence by nature, FPI is more unstable.
- According to SEBI (Security and Exchange Board of India), any equity investment by non-residents less than or equal to 10% of capital in a company is portfolio investment.
- Any investment above 10% will be counted as FDI.
- As per SEBI regulations, FPI is not approved in unlisted shares and investment in an unlisted body is considered FDI.
- Foreign Portfolio Investors constitute investment groups of Foreign Institutional Investors (FII’s), Qualified Foreign Investors (QFI’s), etc.
Factors spur FPI
- With a promising approach of notable returns, FPIs attract investors into any county's market.
- For instance, as per NSDL (National Securities Depositories Ltd.) data, in 2002, FPIs in the country were Rs. 3682 Crore which hiked to 1.79Lakh Rupees in 2010.
- Despite the 2008 Economic crisis where India witnessed FPIs sell-off, the Nation showed remarkable growth in the economic field.
Facts of FPI crisis
- Withdrawl of FPI worth ₹1.18 lakh crore in March alone soon after GOI declared nation lockdown due to Covid pandemic.
- Benchmark stock index Sensex fell from 42,270 in February 2020 to 25,630 in March 2020.
Reason for FPI sell-off
- Post pandemic, recovery in the Indian economy has been unstable. The second wave of the COVID19 pandemic in 2021 destroyed lives and livelihoods.
- The economy was hit again, in early 2022, with rising cases of Omniorn variant.
- The recovery from the economic crisis witnessed suppliers off guard, resulting in supply-side shortages.
- Amid the pandemic crisis, the Russia-Ukraine war too affected the global economy.
- The Russia-Ukraine war resulted in inflation across various countries especially India.
- Prices of certain foods including Rice and Wheat hiked resulting in an import ban in India.
- Industrial production has shown a slow recovery from the damage due to pandemics.
- For example, the S&P Global India Manufacturing Purchasing Managers’ Index (PMI) slid to 53.9 in June — the lowest level in nine months — from 54.6 in the previous month.
- U.S. Federal Reserve raising the benchmark interest rate starting March this year.
- 15 June, the Fed announced the most complex interest rate increase in almost 30 years, raising the benchmark borrowing rate by 0.75 % points in its battle against surging inflation.
- The key rate range had gone up from 00.25% in March to 0.751% in May.
Impact of FPI sell-off
- Most and major FPI sell-off are on domestic currency value which takes a significant fall as investors sell Rupee currency in exchange for their home local market currency.
- The supply of the Indian rupee in the market rises, and its value decreases.
- The rupee has seen an all-time low currency value.
- Indian Rupee stands weaker at 79 Rs per US dollar whereas a year ago it was upto 72-73 per USD.
- The most significant impact is on the cost of our crude oil imports which contribute to 85% of India’s oil needs.
- The Indian currency has weakened due to the Russia-Ukraine war.
- The economy of India stands affected due to which imports and exports have been unstable.
- Post pandemic recovery by industrial manufacturers has been slow which affects the economy largely.
- Due to this, Indian Ruppe has been weakened as it stands at 79 Rupee per USD.
- India needs to increase more of their fund for imports at the same cost unit.
- India’s trade policies have to be enhanced in such a crisis to make a positive impression among investors across the globe.