Foreign Portfolio Investors (FPIs)

In News

• Recently, a trend has been observed where Foreign Portfolio Investors are exiting the Indian market.

About Foreign Portfolio Investors (FPIs)  

• It consists of securities and other financial assets held by investors in another country. 
  • FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds.
• It does not provide the investor with direct ownership of a company’s assets and is relatively liquid depending on the volatility of the market.
• Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy. 
  • FDI and FPI are both important sources of funding for most economies.
• FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).
• FPI is more liquid, volatile and therefore riskier than FDI. 

Advantages and disadvantages of FPI 

Reasons behind FPIs selling India holdings

• COVID-19: Post-pandemic, recovery in the Indian economy has been uneven. The pace of recovery caught suppliers off guard, contributing to supply-side shortages.
• Russia’s invasion of Ukraine: Commodities such as sunflower and wheat supplies from these two nations were impacted leading to a rise in global prices for these crops.
• Inflation: As supplies in general tightened across the globe, commodity prices too rose and overall inflation accelerated.
• Industrial production has been hit without giving confidence of a full and final recovery from the pandemic.
• U.S. Federal Reserve: apart from inflation, the U.S. federal Reserve is raising the benchmark interest rate which has added to the problem.
  • When the differential between the interest rates in the U.S. and other markets narrows, and if such an occurrence is accompanied by the strengthening of the dollar, then the ability of investors to realise healthy returns is impacted.

Impact

• Decline in confidence: All the factors discussed above are contributing to a decline in confidence of robust economic performance; FPIs have been exiting market investments over these past months.
• Effect on local currency: When FPIs sell their holdings and repatriate funds back to their home markets; the local currency takes a beating as they sell rupees in exchange for their home market currency.
• High crude oil prices: The major impact is on the cost of our crude oil imports that contribute to 85% of our oil needs.
• Stock market: 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.

Way Forward

• Experts say that investors should stick with their existing investments in domestic equities.
• Investors should not look to redeem their holdings in the current market.
• Soon the revival of the markets is going to bring gains for investors.
• Investors should not go for lumpsum investments and should instead continue with the systematic investment plan mode.

Source: TH