Foreign Funds have net sold in the Indian cash market to the tune of Rs 23,969 crores in the month of Sept. Here are a few factors that led to the massive selling in the markets this month.
Fall in the rupee
As long as the rupee is stable, we would see steady inflows from Foreign Funds. However, a weak rupee would lead to erosion in portfolio values. This leads to some selling pressure from foreign funds. This is what has been happening over the last couple of weeks, where we have seen some massive selling by Foreign Funds after the rupee fell to a six month low.
While the RBI may intervene in the forex market, if the trend continues, we might see fresh selling in stocks that could emerge. This would be true, if we largely see a fall in the rupee.
Economic fundamentals deteriorate
Economic fundamentals are fast deteriorating. GDP for the quarter ending June 30, 2017, at 5.7 per cent was the lowest in three years.
The current account deficit has expanded and inflation seems to be on a rise all over again. Sentiments on the economy have also taken a turn for the worst, after an editorial by former Finance Minister, Yashwant Sinha on the state of the economy.
Investors, including Foreign Funds have been eagerly waiting for an economic revival, which has not been forthcoming.
India third worst performing markets
India remained the third worst performing market in September. All other emerging markets like Brazil, Thailand, Philippines, Korea, Indonesia and Malaysia notched smart gains during the month of September. The only emerging markets that saw a fall along with India were South Africa and Taiwan.
In August too foreign funds had sold heavily to the tune of almost Rs 12,600 crores. It is difficult to predict when they would stop, and two successive months of selling from them is not something that we see very often.
US Fed to hike interest rates
Analysts and economists are expecting the US Fed to hike interest rates once again in December. What this means is that money moves from equity to debt, as interest rates move higher. The first casualty is always emerging market equities.
The US Fed has also given a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities. With the ECB also likely to focus on normalization of its policy, monetary stimulus seems to be getting withdrawn. This is not good news for emerging markets.
Rising crude prices
India is always sensitive to global crude prices, as it tends to alter everything from inflation to the current account deficit. We have been seeing a steady rise in the prices of crude oil over the last few weeks.
In fact, if inflation rises on account of rising crude prices, we may soon see the RBI putting on hold any further interest rate cuts. This is certainly not good news for the markets, given that they have been rallying on the back of lower interest rates, which has pushed people to move from deposits to equities.